Covered Bonds

Two Danish issuers completed auctions of mortgage backed covered bonds to refinance adjustable rate mortgage (ARM) loans this week. Nordea Kredit Realkreditaktieselskab sold DKK11bn on Wednesday, and Realkredit Danmark on Thursday auctioned Eu680m of one year bonds.

Covered bond analysts have turned their attention to rising house prices in Scandinavia, following a report by Standard & Poor’s, which warned that rising private sector debt to GDP levels, fuelled by increased mortgage borrowing, could present a danger to banks and their assets in the event of a severe economic downturn.

After a lull in supply over Easter, a window opened for borrowers from core jurisdictions, and banks from Sweden, Norway, Finland and Denmark all took advantage of the safe haven bid.

The flight to alternative currencies was highly visible this week with some core markets almost shut due to market uncertainty over the outcome of Greece’s second bail-out. The Swiss franc market — the most active niche sector — illustrated the point by maintaining a continuous flow of supply throughout the week.

Finland is an unlikely candidate to dominate the covered bond market, yet it was benchmarks from Sampo Housing Loan Bank and Aktia Real Estate Mortgage that represented the sum total of primary market activity this week.

There were few indications that a success was on the cards, given that Sampo’s Eu1bn ten year struggled and that market volatility had scared off other issuance this week but Aktia Real Estate Mortgage Bank’s Eu500m five year trade on Wednesday attracted enough investor interest to warrant an increase.

Moody’s placed Société Générale (Aa2), Crédit Agricole (Aa1) and BNP Paribas (Aa2) on review for possible downgrade on Wednesday, because of their exposure to the Greek private sector and government debt, and a potential inconsistency between the impact of a possible Greek default or restructuring and the banks’ higher rating levels.

The covered bond market was quiet on Thursday, though syndicate officials said there were several borrowers that would like to complete trades before the summer lull. Prospective issuers have ample reasons to wait given that a resolution of the situation in Greece appears elusive. However issuers in the UK, New Zealand and Germany will have finished roadshows by the week’s end, and Italian and French names are monitoring the market.

Standard and Poor’s downgraded four Greek covered bond issuers from B to CCC, and removed them from credit watch negative on Wednesday, because of increased risk to their financial profiles.

Aktia Real Estate Mortgage Bank defied difficult market conditions on Wednesday to build a twice covered book for an intended Eu500m five year trade, which allowed the borrower to increased the deal size to Eu600m. The result stands in contrast with fellow Finnish issuer Sampo Housing Loan Bank, which found the going much tougher on Tuesday for its Eu1bn ten year trade.

Sampo Housing Loan Bank sold a Eu1bn 10 year transaction on Tuesday, which despite high credit and cover pool quality priced at the wide end of guidance. Syndicate officials pointed to a rise in rates and general aversion to risk among investors as two factors that held the transaction back.