Covered Bonds

Approval to create a new banking group, Kutxa Bank, has prompted Fitch to place the Long-term Issuer Default Ratings (IDR) and Viability Ratings (VR) of two of the three merging cajas, Bilbao Bizkaia Kutxa (BBK) and Kutxa, on Rating Watch Negative.

A rumoured second round of ECB bond purchasing has breathed life into what had been a dormant covered bond market — but don’t get too excited. Curiously, even with this week’s supply, September issuance is going to fall short of September 2008 when Lehman collapsed. That should tell you something.

Nationwide has mandated leads for a US dollar RMBS. The deal comes after a successful credit card deal from Barclays and an earlier RMBS from Santander UK. With the European market in the doldrums, both in the covered and in ABS, more and more issuers are considering setting up 144A documentation to take advantage of this rich seam of demand.

A new law allowing Hungarian home owners to pay off foreign denominated mortgages in Hungarian forints at a discounted rate highlights the greater risk of sovereign intervention inherent in local banks, according to one covered bond analyst. Moody’s also took a dim view of the law, saying it could affect Timely Payment Indicators (TPI) – and perhaps ratings - of Hungary’s two covered bond issuing banks.

Syndicate officials remained hopeful that primary supply will continue into next week, though a German bank holiday on Monday and non-farm payrolls on Friday may narrow the issuance window. This week’s trades have been reliant on domestic banks and syndicate bankers are therefore still awaiting a broadly distributed jumbo trade to spur activity. With selling pressure in the secondary easing and one primary trade performing well, there is cause for a little optimism.

Many accounts and bankers are off to Munich for the beer festivities and with quarter end approaching, there has been a slight slackening of activity after a relatively good run this week. Spanish and Italian bonds are slightly softer versus the strong performance of their respective government bond markets.

It might have been a French issuer to have restarted benchmark activity in the euro covered bond market this week but all the subsequent supply came from German and Austrian Pfandbriefe issuers. Of the three small, overwhelmingly domestic transactions only a debut from Austria’s Raiffeisen Landesbank Steiermark could be deemed an outright success.

A first Swiss franc floating rate issue from Swedish Covered Bond Corp sustained relentless recent covered bond flow in the currency. But the product is now close to saturation point, bankers warned.

Rating: Aaa/AAA/NR

The dormant covered bond market was woken up this week after it emerged that the European Central Bank will consider a second covered bond purchase programme at next week’s policy meeting. But, the fact that none of this week’s deals reached €1bn, and that many were a long way short of that size, illustrates a continued lack of confidence borne by a belief that the prospective buying is no panacea.

France’s Crédit Mutuel Arkéa took advantage of a solid bid from domestic insurance companies and asset managers to price a €750m 10 year transaction on Tuesday — the covered bond market’s first euro benchmark trade in nearly four weeks.