Covered Bonds

Fitch became the latest rating agency to downgrade bonds to the border of sub investment grade on Thursday, when it cut the covered bonds of four Greek banks. Its leniency relative to Moody’s, which already rates the covered bonds concerned sub investment grade, means the bonds remain repo eligible.

BNP Paribas has launched the first dollar covered bond index that includes non-SEC registered transactions, which make up nearly all of dollar denominated covered supply. But the French bank will need market interest to legitimise the decision to include bonds that are not allowed on other leading indices, according to market participants.

Investors have cash to put to work and there is scope for modest covered bond issuance next week if stable market conditions prevail, but thereafter the funding window is expected to move to late August.

The covered bonds of Portuguese and Irish banks are drawing ever closer to sub-investment grade status, though they are likely safe for the summer. Moody’s on July 12 cut Ireland from Baa3 to Ba1 and assigned a Timely Payment Indicator (TPI) of Very Improbable to all Portuguese mortgage-backed covered bonds. Some issuers are rated only by Moody’s, though should the sub-investment rating line be crossed, analysts expect the European Central Bank to alter its criteria for repo eligible collateral.

A change in leadership at the Federal Deposit Insurance Corporation seems unlikely to make the organisation more receptive to US covered bond legislation in its current form. Rating agency DBRS reports that vice chairman Martin Gruenberg believes that in the event of a bank failure, the FDIC and not investors should have first rights on excess covered bond collateral.

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.

Insurance companies will increase their holdings of covered and government bonds, while reducing their allocation to equity and long term corporate bonds, according to a report from the Bank of International Settlements.

Sweden's Stadshypotek tapped the domestic market on Wednesday, printing a Skr1.5bn ($230m) three year FRN with a 3-month Stibor plus 0.34% coupon. The funding exercise illustrates the importance of having a core domestic investor base, particularly when markets become volatile.

Investors have plenty of cash to put to work and there is scope for modest issuance next week if stable market conditions prevail but thereafter the funding window is expected to move to late August. In the secondary market, spreads are slightly wider but activity is mostly confined to price checking. Italian auctions went well, breeding a little confidence but overall conditions still remain nervous.

Dealers and investors remain shell shocked by recent events. Despite relatively upbeat comments from the buy side and a continuation of the spread correction, reported secondary activity has been muted. Syndicate bankers are looking towards stabilisation of the Bund/swap spread and do not rule out the prospect of issuance, though it may be limited to taps.

The covered bonds of Portuguese and Irish banks are drawing ever closer to sub investment grade status, though they are likely safe for the summer. Moody’s on Tuesday cut Ireland from Baa3 to Ba1 and assigned a Timely Payment Indicator (TPI) of Very Improbable to all Portuguese mortgage backed covered bonds. Some banks are rated only by Moody’s, though should the sub investment rating Rubicon be crossed, analysts expect the ECB to alter its criteria for repo eligible collateral.

The covered bond market faces the prospect of prolonged closure, though it has survived months without issuance in the past. August is traditionally a quiet period, and many issuers are well funded. Others are less so, and if the shutdown lasts into September it could have serious repercussions for the primary and secondary markets.