Covered Bonds

Moody’s cut the residential mortgage backed covered bonds of two Cypriot issuers to the border of sub investment grade on Thursday, following a downgrade of Cyprus and the respective bond issuers.

The prospect of a new covered bond issue being priced through government comparables moved considerably closer this week in Italy after the Obbligazioni Bancarie Garantite (OBG) of Intesa Sanpaolo and UniCredit traded 100bp through BTPs.

Hungary’s OTP Mortgage Bank and Bayerische Landesbank tried to cut through the market malaise this week by offering something different: floating rate covered bonds.

Standard & Poor’s left Spain’s multi-cédulas strewn across the investment grade spectrum on Monday, downgrading 47 transactions totalling €103bn from AAA to between AA+ and BBB-. Nine notch downgrades are unprecedented in the covered bond market, and the rating action leaves gaps of up to six notches between the ratings of S&P, Fitch and Moody’s on the same transaction.

An Italian banker tells The Cover that confidence in his domestic market can only be restored if the prime minister and finance minister can make up their differences. He sees good buying of Italian covered bonds against BTPs and has a high expectation that a covered bond deal will price inside the BTP this year.

OTP Mortgage Bank priced a €750m floating rate covered bond on Wednesday, but the market is not sure what to make of the trade, which was driven by a substantial reverse enquiry and for which statistics on allocation were withheld.

Just when it looked like the covered bond primary market had closed for the summer, Hungary’s OTP Mortgage Bank announced a three year floating rate covered bond on Wednesday, the second floater in the covered market in as many days. Sole lead BNP Paribas opened books at a guidance level of three month Euribor plus 300bp.

A proposal to create Brazilian covered bonds from the Association of Real Estate Loans and Savings Companies (Abecip) is credit positive for the country’s banks, said Moody’s. Abecip presented the proposal to the central bank in an effort to create a funding instrument that can support Brazil’s fast-growing real estate financing market.

With its 10 year benchmark covered bond still sidelined by market conditions, Bayerische Landesbank on Tuesday tested investor appetite for something totally different: €250m of 18 month floating rate covered notes.

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.