Covered Bonds

Fitch downgraded Banco de Sabadell and Banco Español de Crédito (Banesto) on Wednesday, because of exposure to the Spanish real estate sector and the weak economic environment in Spain.

Four major investors talked to The Cover about their near term strategy and thinking. They do not think much will change, even if there is a positive Greek outcome. Though two of them felt sentiment could improve a little if the prospective Bankia IPO is successful, confidence in the banking sector is not in great shape.

Leads Deutsche Bank and Natixis have issued guidance on Achmea’s new Dutch RMBS, DMPL IX, with the two year ‘A1’ class at 95bp-100bp and the five year ‘A2’ class at 140bp. This is outside the levels BNP Paribas’s Phedina 2011-1 achieved last week – that deal was priced at 90bp and 130bp for tranches of similar average life. However, a large lead order helped to anchor that price and the BNPP deal had around 40% NHG-guaranteed mortgages in the pool.

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 environment means that this could take a while – though Belgium’s major banks have all thrown their weight behind the law.

Moody's has assigned covered bond ratings to the newly formed Spanish Banca Civica, which is the merger of Caja de Burgos, Caja Navarra, Caja Canarias and Cajasol completed on June 21. The mortgage backed covered bonds are rated A1 and are under review for downgrade. The public sector covered bonds are rated Aa3 and also on review for a downgrade.

All eyes are on the Greek vote this Wednesday and the start of the new quarter on Friday. Until then, the primary market is likely to be quiet. Aside from those issuers that have already mandated, there are rumours that two or three German borrowers are lining up to do dollar denominated benchmarks. The secondary market has seen some flow, and after recent heavy selling, interest has been more two way with some clients tentatively picking up cheap peripheral bonds and others tempted to pick up long dated core paper yielding over 4%.

The revised bill for the US Covered Bond Act 2011 is “positive for the development of a viable US covered bond market” because the three adopted amendments do not weaken investor protections, Moody’s said in a note published on Monday.

Following Amagerbanken's collapse, Denmark’s Fjordbank Mors has become the latest bank casualty after it failed to meet the local regulator’s solvency requirements. The bank’s failure comes amidst growing concern over the country’s high household indebtedness and increased rating agency scrutiny of local covered bond programmes. Realkredit Danmark and Nykredit have both restructured their covered bond pools, isolating adjustable rate mortgages. Other issuers are expected to follow. And, in response to Moody’s increasingly draconian approach, Realkredit has dropped the agency.

Market volatility has ruled out any issuers doing a deal at short notice at the start of this week. Syndicate officials are clinging to hopes that the Greek parliament will pass austerity measures without springing more surprises, offering enough stability to open a window for borrowers from Wednesday.

The covered bond sector saw only one trade this week, a small German deal from an inaugural issuer — precisely the sort of funding that would be expected to work in a difficult market environment. The outlook for next week does not look much more promising either — although there is a fair chance HSBC will issue its inaugural dollar benchmark.

After recently restructuring its covered bond programme, removing the capacity to issue RMBS, HSBC could price its inaugural US$ benchmark next week. The borrower has been on the road in the US this week with BNP Paribas, HSBC, RBS and Société Générale.

Moody’s has placed five Italian covered bond programmes on review for downgrade along with the long term debt and deposit ratings of 16 Italian banks. Its negative rating action suggests the prospect of a double A Italian covered bond market is nearing.