Covered Bonds

A CROSS-section of six different types of investor, along with bankers from Crédit Agricole CIB’s trading, syndicate and research desks gathered to discuss the changing face of the covered bond market. The roundtable poignantly captured the mood of the market, just as the European Central Bank intervened to buy Italian and Spanish government bonds.

Cédulas and multi-cédulas continue to fall under the gaze of rating agencies, with Moody’s putting Banco CAM’s cédulas programmes on review for downgrade and Fitch placing two of Banco de Valencia’s multi-cédulas hipotecarias on rating watch negative. The downgrades come as bankers complain that rating agencies have overlooked certain strengths in these deals.

ABS analysts at Deutsche Bank argue there is better value in German conduit CMBS compared to Pfandbriefe. A research note published Monday said that certain senior AAA rated issues from high quality deals are priced at a level implying they are almost 30 times more risky than covered bonds, despite having comparable leverage.

After the optimism of Barcelona, bankers have returned to their desks this week in a very glum mood. Renewed volatility in the sovereign and bank finance markets has undermined the little confidence on show at the Covered Bond Conference in Spain last week. The secondary covered bond market is practically closed and, though there are plenty of deals in the pipeline, the primary market is on hold — pending a more stable environment.

The National Bank of Belgium has made covered bond legislation a priority, bringing the law a step closer to enactment, according to bankers involved. A legislative framework will provide clarity on post-insolvency situation and cheaper funding for the country’s banks but it is still not clear how politicians will treat legislation that may raise the cost of protecting depositors.

Covered bond traders are complacent, one investor told a panel at the European Covered Bond Council plenary on market dynamics. Despite market volatility, sovereign and senior traders had been able to continue to make markets but covered bond traders had shut up shop, he said.

The winners on this year's covered bond awards based on a poll of around 340 votes - of which about 25% were issuers and 50% were investors.

Australian politicians will start debating a covered bond law in the middle of next month, after the Treasury drafted legislation that would limit covered bonds to 8% of banks’ assets.

The panel on new covered bond markets at the Euromoney/ECBC Covered Bond Congress was punctuated by disagreement among some of the participants over how new legislation should define a covered bond.

In a panel on new markets at Wednesday’s European Covered Bond Council plenary session it was stated that much hyped US covered bond legislation might not materialise until 2014. But with the OCC and not FDIC likely to be the US covered bond regulator for big banks, a market size of up to $640bn is seen. The Canadian covered bond market is likely to lack homogeneity as non federally regulated borrowers are excluded from the law.

Santander UK’s Holmes 2011-3 RMBS picked up an impressive $2bn of demand for its ‘A2’ dollar tranche illustrating the depth of demand in dollars. Moreover, the new issue premium was negligible.

The privileged position of covered bonds in incoming regulation was a major topic at the Euromoney/ECBC Covered Bond Congress in Barcelona on Thursday. Regulators have tipped the balance too far in favour of covered bonds risking health of the bank funding market as a whole.