Covered Bonds

The covered bonds of Greek banks would likely be downgraded to below investment grade in the event that Greece’s sovereign rating is lowered to C, said Fitch on Wednesday.

Syndicate officials are expecting at least one covered bond trade on Wednesday morning, providing the outcome of a vote of confidence in the Greek parliament is positive. ING-DiBa remains the best hope for issuance this week, though a French name could also make an appearance.

Korea Housing Finance Corporation will begin a roadshow for its second ever covered bond on Thursday, hoping to price a deal in early to mid July.

UK covered bond issuance hit record levels in the first half of 2011, attracting greater interest from banks and central banks compared with last year, research from Barclays Capital has shown. All UK programmes offer good value compared with core paper, but Barclays’ pick for investors is Abbey, whose spreads have widened because of concerns over exposure to Spain.

Back in March, Fitch said that it “did not view over-dependence on covered bonds as a risk for many banking groups.” Roll on three months and the rating agency’s tone is a bit more measured. “An over‐reliance on secured financing could encumber most assets on the company’s balance sheet, reducing overall financial flexibility,” said the agency, in a wider looking piece on bank funding profiles.

Guaranteed residential home loans used as collateral for French Obligation à l’Habitat could be riskier assets than residential mortgages during a severe economic downturn, despite lower loss given default values.

The conversion of French structured covered bond programmes into the Obligation à l’Habitat (OH) format is causing confusion in the index world, said LBBW analysts. French iBoxx covered indices have become less representative of a clearly defined market segment, the research said, and iBoxx is currently discussing whether to create a new sub-index for the OHs.

BNP Paribas’s Dutch RMBS, Phedina 2011-1, was fully covered at Friday’s guidance of 90bp-95bp for the two year ‘A1’ tranche and 130bp-135bp for the five year ‘A2’ tranche, with more orders coming in on Monday morning.

The covered bond market remained inactive on Monday. Though several issuers have deals to bring, the environment has not become any more receptive to issuance. Fears of contagion from Greece rule out peripheral supply, and one syndicate official on a prospective trade from a core name said he had advised delay.

Fitch downgraded Italy’s Banco Popolare from A- to BBB+, on stable outlook, because the agency believes it will be difficult for the bank to improve profitability in an unfavourable market, and because of the bank’s high level of impaired loans.

Issuers are waiting for some better news out of Greece before deciding whether to press on with transactions, despite most receiving strong interest during roadshows. After selling in the secondary market on Thursday, sovereign spreads on Friday tightened on rumours of an aid package for Greece. But with market sentiment yo-yoing from one day to the next, any window for issuance before the summer lull is likely to be narrow, and perhaps too risky for first time euro borrowers such as ANZ Bank.