Covered Bonds

The passage of the austerity bill through the Greek parliament on Wednesday has ushered in a period of mild relief in the covered bond market, but syndicate officials do not expect large volumes of primary issuance. Windows are likely to be short, which will suit established names that can move quickly.

While the euro covered bond market slows, the dollar pipeline continues to build. Cheap funding and diversification are attracting issuers, while US demand for trusted European names remains unabated. Dollar issuance is expected to expand in the latter half of 2011, which may have the added bonus of supporting the case for US covered bonds. The latest incarnation of the US Covered Bond Act of 2011 has been well received by market participants, including Moody’s, which published a statement on the amended bill on Monday.

A rapid series of punishing ratings actions has left Moody’s and Denmark’s banks at war, with Realkredit — the country’s second largest mortgage lender and a key part of Danske Bank — dumping the US agency and others considering following suit.

Belgian banks have submitted feedback on Belgium’s draft covered bond law and are waiting for the ministry of finance and the central bank to begin the political process to enact the legislation. The country’s notoriously fractious political set-up means that this could take a while — though Belgium’s major banks have all thrown their weight behind the law.

As the first half of the year draws to a close, the original 2010 predictions for total covered bond issuance in 2011 from most analysts appear exceptionally conservative. Several analysts have revised their estimates, and predictions for covered bond issuance over the next six months are in the Eu80bn-100bn range.

The ‘A1’ tranche on Achmea’s DMPL IX RMBS showed just how insulated Dutch prime RMBS has been from Greek fears, as leads Deutsche Bank and Natixis priced an increased size of Eu253.9m 5bp inside the tight end of guidance.

Leads Barclays Capital, JP Morgan and Morgan Stanley released guidance on Co-op Bank’s new UK RMBS Silk Road No. 2 on Wednesday, following the result of the Greek vote. With cash prices on the benchmark Granite programme down this week amid dealers dropping inventory, the leads seem to be offering some premium to recent comparable UK primary issues.

The Greek parliament met market expectations yesterday and approved the austerity bill, ushering in a period of mild relief however temporary it turns out to be. Secondary market flows picked up, particularly for Spanish cédulas which showed stronger buying interest. But covered bond syndicate officials do not expect a long window for primary issuance. CRH and OP bank have been quick to take advantage of the more positive mood with the former raising Eu1bn of 11 year funding via a tap and the latter mandating leads for a seven year to be priced tomorrow.

The South Korean Financial Supervisory Service (FSS) and Financial Services Commission (FSC) notified the Korea Federation of Banks and commercial bonds of a list of guidelines on the issuance of covered bonds on Thursday.

HSBC became the latest issuer to tap the dollar market on Tuesday, pricing an inaugural $1.25bn three year deal. In contrast to euro denominated supply, which in H2 2011 is not expected to match the record amount issued in the first six months of the year, dollar issuance is expected to expand. German and Italian issuers are understood to be preparing debut dollar benchmarks, and the South Korean government today encouraged certain banks to increase issuance.

Covered bond bankers expect the Greek parliament to approve austerity measures in today’s vote, but even if that happens, they do not expect much of a relief rally. If the measures are not approved then it’s likely that the consequences will be catastrophic.