Covered Bonds

Fitch downgraded Washington Mutual’s covered bonds from AA+ to AA on Monday, because deterioration in US payment-option and interest-only hybrid adjustable rate mortgages (ARM) has increased loss expectations on the cover pool.

An Italian covered bond investor talks to The Cover about the sovereign market malaise and his position on covered bonds. The increasingly desperate situation shows little sign of relenting, he says, while activity is mostly focused on relative value versus the senior market.

Standard & Poor’s on Monday downgraded 46 multi-cédulas totalling €103bn, and removed them from credit watch negative, because deterioration in the creditworthiness of the participating banks has raised credit risk in the transactions.

Secondary market trading activity has slowed as bank dealers look at the whipsawing Bund/swap spread and soaring peripheral government yields. There has been some small selling in Italian bonds but covered bonds continue to outperform their respective sovereign debt markets and are becoming increasingly detached.

FIG syndicators are increasingly worried that a rush of primary activity may not materialise in September because of sovereign debt worries — despite one German issuer bringing a covered bond on Tuesday.

FIG syndicators are increasingly worried that a rush of primary activity may not materialise in September because of sovereign debt worries — despite one German issuer bringing a covered bond on Tuesday.

Four Greek covered bonds on the brink of junk status will remain on rating watch negative, though structural adjustments have strengthened the programmes. Fitch maintained mortgage covered bonds issued by Alpha Bank, Eurobank EFG, National Bank of Greece (NBG) Programme II and Piraeus Bank on rating watch negative on Friday.

After widening for much of the last week, the periphery sovereign government bond markets are tightening, taking light relief from purported progress on the US deficit stalemate and from positive forward looking Italian economic data. But traded volumes remain anaemic as players hope for a period of stability before possibly re-entering the market in September when primary issuance should become more likely.

Moody’s placed Spanish government bonds (Aa2) and the debt and deposit ratings of five Spanish banks on review for downgrade on Friday, because of funding pressure facing the Spanish government, and challenges to fiscal consolidation. Though the covered bonds of the banks concerned are likely to be unaffected in the short term, the negative rating action is worrying for weaker Spanish issuers.

Moody’s took negative rating action on covered bonds issued by two Danish banks on Thursday, and withdrew the ratings on one. Nykredit Realkredit’s Capital Centre D was downgraded and three of BRFkredit’s programmes were placed on review for downgrade. The rating agency withdrew its rating on Realkredit Danmark’s covered bonds. An S&P report released on Thursday suggests the agency is increasingly bearish about the state of the Danish banking sector.

Turkey’s Sekerbank launched the first Turkish covered bond and the first SME-backed covered bond globally, using a structure that incorporates ABS features. The hybrid format is likely to be adopted by other Turkish issuers and may also be a shining light for challenged peripheral European covered bond borrowers. It could even herald a new collateral asset class from the most traditional market of all — Germany.