Covered Bonds

A trio of Swiss franc deals has been the sum total of European primary market activity in the covered bond space so far this week. DnB NOR Bank, Vorarlberger Landes-und Hypothekenbank and Royal Bank of Canada brought issuance totalling Sfr375m (€328m). Vorarlberger Landes-und Hypothekenbank and DnB NOR Bank came to market on Wednesday, with deals of Sfr125m and Sfr175m respectively.

DnB NOR Bank outshone all other Swiss franc covered bond issues this week with an unexpectedly large Sfr175m 5-1/2 year note issued on Wednesday, despite continuing US and European volatility. On the same day, Vorarlberger Landes-und Hypothekenbank also managed to price a big transaction, a Sfr125 two year FRN covered bond.

Proposals outlined in CRD IV will make the covered bond market more dependent on rating agencies through a direct link between bond ratings and capital requirements, according to DZ Bank research.

Turkey’s Sekerbank is poised to close the first ever Turkish covered bond and the first SME-backed covered bond globally, using a structure that incorporates ABS features.

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.

Compliance departments, legal advisors and syndicate bankers, under the auspices of the International Capital Market Association, could soon unveil a set of new market practices to redefine deal execution.

Peripheral covered bonds lagged widening sovereign debt in the secondary market on Wednesday morning, which was triggered by the German finance minister’s warning that the bond buyback programme needed limits. Despite the comment, some traders reported a surprisingly constructive tone, especially when compared with recent weeks. The closure of the European primary market did not however preclude Canada’s Bank of Nova Scotia from issuing a US dollar benchmark which, by virtue of the strong order book, was increased and priced at the tight end of the guidance range.

Turkey’s Sekerbank on Tuesday partially closed on series one to three of its TL800m (€335m) covered bond programme. The transaction is the first covered bond out of Turkey and the first SME-backed covered bond globally.

Lloyds Banking Group’s latest RMBS proved the resilience of US dollar demand for European triple-A rated residential mortgage backed product.

The outlook for the bank funding market was suddenly far brighter on Thursday evening than it had been for several weeks with Europe’s finance ministers on the brink of agreeing a Greek rescue package. But spreads are still high, and any deal agreed is unlikely to be the last. Banks could be looking at a difficult September.

The covered bond market’s dependency on rating agencies is set to grow under the proposals outlined in the Capital Requirements Directives IV as the draft directly links covered bond ratings to capital requirements, according to DZ Bank research. Meanwhile, the jump in capital charges from triple-A to double-A bonds set out in Solvency II will also encourage insurers to scrutinise covered bond ratings much more closely.

After digesting the details of a rescue plan for Greece, traders have marked back Spanish and Italian sovereign debt following a brief relief rally on Friday. Secondary market activity was subdued on Monday, and though covered bond spreads have lagged sovereign tightening, making them look relatively cheap, traders said it was never enough to be market moving.