Covered Bonds

Investors need to be more aware of how a lack of transparency over issuer taps can adversely affect the performance of covered bonds in the secondary market, Barclays Capital research has said. Market traders find their job more difficult and tend to price bonds wider, which has a knock on effect for bond holders and issuers. The research advises investors to buy-and-hold as a result and to try to participate directly in the taps.

Rating agencies have too much influence over covered bonds and banking systems in general, said Deutsche Bank analysts on Friday. Omitting rating triggers from laws, and limiting the use of rating triggers in prospectuses, they suggested, would help reduce the rating agencies’ influence.

Northern Rock has sold the ‘A2’ notes of its debut RMBS, Gosforth Funding, in a semi-private deal with a margin of 160bp – a relatively cheap level given the pristine collateral and exceptionally conservative prepayment assumptions.

Michael Rudd has left UBS New York, where he had been working as a covered bond and financial institutions trader, to join RBC Capital Markets as a director of its fixed income platform in New York. Rudd reports to Ben Colice who is head of RBC covered bond origination.

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.

A trio of foreign financial institutions pulled off successful Swiss franc bonds this week, including a perpetual that marked its issuer’s debut deal in the currency with the market’s highest coupon this year, despite Thursday’s sudden drop in swap rates.

The US Covered Bond Act 2011 took another step forward on Wednesday when the House of Representatives Financial Services Committee overwhelmingly voted in favour of the proposed bill. But it is premature to predict what a final law will look like and, crucially, whether it will allow a US covered bond market to take off.

The US Covered Bond Act 2011 took another step forward on Wednesday when the House of Representatives Financial Services Committee overwhelmingly voted in favour of the proposed bill. Two amendments that aimed to give the Federal Deposit Insurance Corporation covered bond oversight powers were voted down, so the bill heads to the House of Representatives floor in a relatively investor friendly state. But there were already small indications that more compromise may be needed to win over sceptics.

The spotlight remains firmly on the Greek tragedy with bankers anxiously awaiting fresh developments in the hope that there may be some sort of reprieve. Issuers are well funded and can probably sit it out for now but the omens do not look promising. Bank traders say that selling pressure on the peripheral covered bond markets has continued unabated and, with many banks believed to be sitting on significant inventory, there is an increased risk of near term spread widening.

Deutsche Bank and Natixis have been mandated for Achmea Hypotheekbank’s new Dutch RMBS, Dutch Mortgage Portfolio Loans IX (DMPL IX), while BNP Paribas’s Phedina has priced.

Germany’s ING-DiBa kept primary supply alive on Wednesday, pricing one of the tightest five year covered bonds of the year. As an inaugural Pfandbrief, Eu500m in size and five years in maturity, the trade was never likely to struggle. Syndicate officials expect no further issuance this week, however, as few borrowers can bring deals which boast similarly attractive qualities.

Abbey, Compagnie de Financement Foncier (CFF), Dexia Kommunalbank AG, Erste Bank, La Caixa and UniCredit all made presentations to UK based investors at an event sponsored by Crédit Agricole CIB this week. Whilst it was clear that many issuers are well advanced in their funding for this year, and seem to have plenty of liquidity to draw on, it is also clear that when the funding window re-opens, issuance is likely to take-off.