Covered Bonds

UBS and Eurohypo tapped the short end of the curve on Thursday, leaving long dated supply to UniCredit. Swedbank issued a five year dollar benchmark. Meanwhile the pipeline continues to build, with HSBC, Nordea Bank Finland, and Deutsche Pfandbriefbank announcing roadshows ahead of planned transactions.

ING reopened the covered bond market on Wednesday, launching the first euro benchmark in almost two months. Syndicate officials had been waiting for a top tier name from core Europe to end the August lull after a series of successful SSA trades. Several were still surprised, however, that with indices widening and volatility ever present, a borrower stepped forward to pull the trigger on a 10 year trade.

Prospective buyers of peripheral paper are waiting for imminent Spanish and Italian auctions to indicate market sentiment, said syndicate officials. Meanwhile the covered bond market would benefit from more attention to credit fundamentals, as opposed to an exclusive focus on underlying government bonds, said Morgan Stanley analysts.

Purchases of government debt by the ECB stalled a rise in Spain’s borrowing costs and resulted in its sovereign CDS dropping from over 400bp to 350bp at the end of last week. On Monday morning Spanish and Italian government bonds tightened slightly against Bunds, though Spain’s CDS widened out to 375bp, with market participants concerned over the lack of a long term solution to the sovereign debt crisis.

Covered bond traders and syndicates warned against premature optimism during the relative calm at the start of this week, and it turns out those warnings were apt. But syndicate officials have not given up hope of issuance in the next few weeks even though the possible candidates to reopen the market are down to a select few from Germany, the Nordics and the Netherlands — and those with credit lines to US investors are now even better placed.

With US Treasuries and government-sponsored enterprise (GSE) paper closed to buyers with a dedicated triple-A policy, European covered bonds may enjoy increased interest from US investors in search of assets. Syndicate officials said that in spite of several mandates for investor meetings ahead of euro issuance (see story opposite) it could be a dollar deal that reopens the covered bond market after the August interval.

Austrian, Nordic and French borrowers this week announced roadshows for the end of August, raising hopes for a resumption of primary supply in the covered bond market in September. But with the sovereign debt crisis weighing heavily on investors’ minds, issuance could be more difficult — or at least more expensive — than usual for credits from the market’s most recent target of sovereign scrutiny, France.

The pipeline for issuance continued to build on Thursday, with Austrian, Nordic, and French borrowers scheduling investor meetings ahead of planned transactions. Though all prospective trades are in euros, syndicate officials said it could be a dollar trade that reopens the market.

A steady supply of high quality Germany SSA paper continues to give the covered bond market hope it will be next in line to reopen. Raiffeisen Landesbank Steiermark is understood to be preparing for a covered trade in early September, and syndicate officials said high quality names from several jurisdictions are assured market access. In the secondary, however, peripheral covered bonds still lag the debt of their respective sovereigns.

The focus of attention is on plunging stock markets, a falling Bund yield, worse than expected German growth and a meeting between President Sarkozy and Chancellor Merkel. Well received SSA issuance should bode well for a German or Nordic covered bond reopener but many have their doubts. Nykredit is on the road in Asia, but it’s strictly non-deal related.

Australian covered bond legislation could be passed and enacted by the end of the year, a treasury official said this week in a speech titled: “Understanding the Key Elements of Covered Bonds Legislation”.

EFSF guaranteed covered bonds could be one solution to dwindling access to term funding among Europe’s banks. Even if markets reopen in September, costs are likely to be high across asset classes, particularly senior unsecured, said market participants. Funding constraints may lead banks to shrink their balance sheets, and if unchecked could lead to a grinding credit crunch in the southern eurozone.