Covered Bonds

Though regulatory uncertainty continues to pose the major challenge for ABS it seems European regulators are finally seeing that their bias for covered bonds may have unintended consequences and that they must therefore ensure a more balanced and level playing field – for the health of the banking sector as a whole.

Santander’s latest cédulas territoriales could represent a shift in the funding policy of Spanish issuers, which are constrained by limited issuance capacity, said Natixis analysts. The transaction's poor result, however, could dissuade Spanish borrowers from turning to cédulas territoriales as their capacity to issue cédulas hipotecárias decreases.

While Finland dominated the primary market on Tuesday, pressure on peripheral names was still the story in the secondary. Italian borrowers are lining up, with a trio of issuers said to be monitoring the market, though a difficult backdrop may mean postponement until next week.

Finnish issuers Sampo Housing Loan Bank and Aktia Real Estate Mortgage Bank came to market on Tuesday. Aktia began taking indications of interest on its Eu500m five year trade following Sampo opening books on a 10 year deal, which will be priced later today.

Brussels, Belgium

Standard & Poor's lowered the sovereign rating of Greece from B to CCC on Monday, and removed it from credit watch negative, though the outlook remains negative. The rating agency believes the cut could have a negative effect on four Greek covered bond issuers.

The introduction of specific Canadian covered bond legislation “would be positive, and would likely provide further assurances for investors”, according to Standard & Poor’s. However, the rating agency emphasised that a codified covered bond law is not enough in itself to merit good ratings. Outstanding concerns include: limits to overcollateralisation, the lack of refinancing options after a segregation event, and Canada’s particular preference for demand loans to finance SPEs.

Demand from insurance companies and pension funds for covered bonds has increased this year, according to Barclays research, while interest from central banks and asset managers has fallen. Germany and Austria are the only regions where overall investor interest for covered bonds has decreased noticeably, though in some jurisdictions investors have participated far less in issuance from certain countries.

Secondary market covered bond trading activity is clearly biased to the sell side with weakness in Italian and Spanish government bonds, undermining spreads in those regions, but selective French bonds are also weaker. However, price action has been more heavily influenced in the belly of the curve, and the wings have held in. Bund yields continue to trend lower amidst hopes of a trend reversal.

Moody’s placed mortgage backed covered bonds issued by Banco Santander Totta (BST) on review for possible downgrade on Friday, after placing BST on rating watch negative on June 9.

Fitch downgraded cédulas hipotecárias issued by Caja de Ahorros y Monte de Piedad de Navarra from AA+ to AA on Friday, and removed them from rating watch negative, following a downgrade of the issuer rating from A- to BBB+.

Moody’s increased the refinancing margins and lowered the timely payment indicators (TPI) from very high to high on 12 Danish covered bond programmes on Friday, following a rise in adjustable-rate mortgage loans (ARM) in Danish cover pools.