Covered Bonds

The UK’s Leeds Building Society issued the first sterling denominated covered bond for two months this week. The £250m 4.25% December 2018 was priced on Wednesday in line with guidance at Gilts plus 165bp through joint leads Barclays Capital and HSBC.

Westpac New Zealand became the second ever Kiwi bank to issue a euro covered bond when it priced a Eu1bn five year deal on Thursday. Fund managers and central banks snapped up the paper, seeing good value relative to core issuers, and took the opportunity to make investments away from European volatility. Investors will be eagerly anticipating further issuance out of New Zealand, with ANZ NZ next in the pipeline.

Borrowers from peripheral and core jurisdictions priced over Eu6bn worth of benchmark covered bonds across three currencies this week, which included inaugural deals from Italian and New Zealand issuers. Prospects for supply next week are similarly diverse, though volatility and European holidays may narrow the window for issuance.

The UK’s Leeds Building Society issued the first sterling denominated covered bond for two months this week. The £250m 4.25% December 2018 was priced on Wednesday at the tight end of Gilts plus 165bp-170bp guidance through joint leads Barclays Capital and HSBC.

Sweden’s Länsförsäkringar Hypotek and Norway’s DnB Nor Boligkreditt took advantage of enduring appetite for Scandinavian paper at both ends of the curve on Wednesday.

Aareal has priced its second Eu500m deal of this year, opting for a five year maturity. Buyer interest was lukewarm compared with previous Aareal trades, adding to the impression that blowouts for smaller core names are becoming harder to achieve. Market participants disagree on whether this was because of a more competitive environment or reduced credit lines to those names.

The primary market for Australasian covered bond issuance took off this week in a series of deals that illustrated both the strength of domestic bank’s issuance programmes as well as robust demand from the local investor base.

Priced at a record-breaking spread to government bonds, UniCredit’s three times oversubscribed benchmark on Tuesday has put clear water between Italy and other peripheral credits ahead of a new wave of covered bond issuers from the country.

After a long Italian drought, Credito Emiliano took advantage of Unicredit’s blow-out reception with a well-timed inaugural three year. Like Credito Emiliano, Westpac New Zealand has also been biding its time for several months but today took the plunge to issue its first benchmark, which is imminently due to be priced.

Aareal on Tuesday priced its second Eu500m deal of this year, opting for a five year maturity. Buyer interest was not as forthcoming as for previous Aareal trades, but the final allocation was more diverse and with a larger proportion of non-German investors. This could be an indication that Aareal, as with other small core names, knows its usual lines are nearing exhaustion and the bank has no choice but to diversify its funding base.

BNZ International Funding Ltd priced the first Kiwi covered bond in Australian dollars on Tuesday. The well prepared A$700m five year met with strong investor demand from a range of domestic and international accounts and provided additional funding diversification for the borrower, following its euro and NZ$ denominated covered bond deals in 2010.

The market has welcomed specific covered bond derivative criteria proposed by Standard & Poor’s, but investors regard derivative risk as secondary to issuer credit risk, and are concerned about a disproportionate impact on ratings. Their comments were made in response to a report the agency published after it requested comment following its covered bond counterparty and supporting obligations methodology and assumptions.