Covered Bonds

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.

Bank of Nova Scotia on Tuesday printed a $2bn 2.15% five year deal, continuing a recent trend of non-European issuers and markets providing primary covered bond supply.

Moody’s placed two Greek covered bond programmes on review for downgrade on Wednesday; EFG Eurobank Ergasias’s second covered bond programme and National Bank of Greece’s global covered bond programme, both rated Ba3. The rating agency said the review followed its downgrade of the Greek sovereign on Monday and a review on the issuer ratings.

Peripheral sovereign bonds are once again heading towards their recent widest spread levels but covered bonds, as usual, are lagging the move. Real money buying of peripheral covered bonds has been at levels 60bp through the government in some cases. Volumes are small, however, and bid offer spreads are wide as concerns around volatility continue to weigh in on sentiment.