Covered Bonds

Though a revision of the Capital Requirements Directives (CRDIV) released today will likely be positive for covered bonds, traders and syndicate bankers are not convinced of any lasting effect on market sentiment. On the contrary, the sovereign debt crisis, they said, can only get worse.

Primary issuance returned to the covered bond market on Monday when Korea Housing Finance Corporation sold $500m of five and a half year bonds. It is the first deal in the international market since July 5, but market participants say it does not herald a rejuvenation of supply - particularly for Europeans, who were glaringly underrepresented in allocation.

Standard & Poor’s cut Bank of Ireland’s UK covered bond programme from A+ to A- and removed it from credit watch negative, though all covered bonds issued under the programme remain on negative outlook.

Korea Housing Finance Corp braved volatile markets to launch a benchmark December 2016 covered bond on Monday — the company’s second dollar issue after a $500m debut last year. But some bankers questioned the timing of the deal, after the debt capital markets ground to a halt last week.

Korea Housing Finance Corporation has opened books on its second ever covered bond, a $500m five and a half year transaction. US book building has yet to commence, but with the book already twice covered on the back of strong demand from Asia and Europe, a good reception seems likely. The deal is expected to price later today.

The euro primary market remained closed on Monday. The secondary market, however, has been more active, with liquidity present for both core and peripheral paper. Even Portuguese bonds have enjoyed interest, as fast money accounts salivate over double digit yields.

Moody’s cut the covered bond ratings of five Portuguese issuers on Friday, following a downgrade of the issuers’ senior unsecured ratings on the same day. The senior unsecured cuts, said Moody’s, were prompted by the downgrade of Portugal’s sovereign debt rating on April 5.

West Bromwich Building Society has postponed its Kenrick No. 1 RMBS, following intense market speculation about the deal’s fate on Thursday. The society’s decision comes at the end of an exceptionally difficult week for Europe’s capital markets including the ABS market. Santander Germany postponed an auto ABS and Banca Etruria held back an Italian RMBS as a result of market volatility on Tuesday.

Fitch became the latest rating agency to downgrade bonds to the border of sub investment grade on Thursday, when it cut the covered bonds of four Greek banks. Its leniency relative to Moody’s, which already rates the covered bonds concerned sub investment grade, means the bonds remain repo eligible.

BNP Paribas has launched the first dollar covered bond index that includes non-SEC registered transactions, which make up nearly all of dollar denominated covered supply. But the French bank will need market interest to legitimise the decision to include bonds that are not allowed on other leading indices, according to market participants.

Investors have cash to put to work and there is scope for modest covered bond issuance next week if stable market conditions prevail, but thereafter the funding window is expected to move to late August.