Covered Bonds

German, French and UK issuers launched trades on Tuesday as indices tightened and stock markets rose on hopes that a solution to the eurozone debt crisis had been outlined over the weekend.

Moody’s has welcomed the Australian Banking Amendment (Covered Bonds) Bill 2011 as credit positive for investors in the country’s covered bonds, and for the nation’s banks.

There has been a slight improvement in market sentiment on Monday morning, with several issuers reporting positive feedback from roadshows. Should an issuer step forward to reopen the market, however, syndicate bankers said it was unlikely to be one of those publically mandated.

Liquidity is still poor in the covered bond market but latest headlines suggest only positive news. The ECB is said to be considering restarting its covered bond purchase programme, while French press reports suggest a three way merger of Dexia Group’s troubled Obligations Foncières issuing subsidiary — DexMA with La Banque Postale and Caisse des Dépots.

Disparities between Moody’s and Standard & Poor’s in their assessment of loss risks in cover pools should dissuade investors from relying on just one rating agency for an understanding of a pool’s underlying strength, said Commerzbank research this week. And with the sub triple A covered bond market set to grow, investors may already be more inclined to scrutinise ratings more closely, and rather than treat them as a mark of quality, rely more on their own analysis instead.

Bail-in fears and the imminent loss of the last part of the senior unsecured market still open to German mortgage banks have driven them to the brink of issuing a once-unthinkable form of debt — structured covered bonds. The idea could work given better asset liability matching will lower refinancing risk and given that the collateral will be 100% German.

Secondary markets broadly remain under pressure, though there are cracks of light appearing here and there. The long end of the French market seems to be stabilising, there have been some buyers of Cédulas and there is still a smattering of interest in selective Scandinavian names. But the outlook remains dim and relative value against other sectors suggests covered bonds are expensive.

Landshypotek issued the first Swiss franc fixed rate mid-term covered bond in two months as investors began to show appetite for longer maturities and fixed rate paper. The borrower priced a Sfr200m 1.5% seven year note, a larger deal than was originally launched.

Denmark’s Nykredit has finished a 12 day auction to refinance its adjustable rate mortgages, selling a larger volume at cheaper levels than last year. Nykredit’s decision to pool all ARMs into a new capital centre, following Moody’s concerns that these loans represent a source of greater refinancing risk, clearly paid off.

Bail-in fears and the imminent loss of the last part of the senior unsecured market still open to German mortgage banks have driven them to the brink of issuing a once-unthinkable form of debt — structured covered bonds.

The final version of the Australian Government’s Banking Amendment (Covered Bonds) Bill 2011, introduced on September 15, contained less stringent requirements on the eligibility of assets in the cover pool and an amended role for the cover pool monitor, though it remains in line with a draft proposal released in June.

BNP Paribas and Natixis took the headline awards at the EuroWeek and The Cover Covered Bond Awards 2011, which were presented at our fifth annual dinner at the Casa Llotja de Mar in Barcelona last Thursday (September 15).