Covered Bonds

Belgian banks have submitted feedback on Belgium’s draft covered bond law and are waiting for the ministry of finance and the central bank to begin the political process to enact the legislation. The country’s notoriously fractious political environment means that this could take a while – though Belgium’s major banks have all thrown their weight behind the law.

Moody's has assigned covered bond ratings to the newly formed Spanish Banca Civica, which is the merger of Caja de Burgos, Caja Navarra, Caja Canarias and Cajasol completed on June 21. The mortgage backed covered bonds are rated A1 and are under review for downgrade. The public sector covered bonds are rated Aa3 and also on review for a downgrade.

All eyes are on the Greek vote this Wednesday and the start of the new quarter on Friday. Until then, the primary market is likely to be quiet. Aside from those issuers that have already mandated, there are rumours that two or three German borrowers are lining up to do dollar denominated benchmarks. The secondary market has seen some flow, and after recent heavy selling, interest has been more two way with some clients tentatively picking up cheap peripheral bonds and others tempted to pick up long dated core paper yielding over 4%.

The revised bill for the US Covered Bond Act 2011 is “positive for the development of a viable US covered bond market” because the three adopted amendments do not weaken investor protections, Moody’s said in a note published on Monday.

Following Amagerbanken's collapse, Denmark’s Fjordbank Mors has become the latest bank casualty after it failed to meet the local regulator’s solvency requirements. The bank’s failure comes amidst growing concern over the country’s high household indebtedness and increased rating agency scrutiny of local covered bond programmes. Realkredit Danmark and Nykredit have both restructured their covered bond pools, isolating adjustable rate mortgages. Other issuers are expected to follow. And, in response to Moody’s increasingly draconian approach, Realkredit has dropped the agency.

Market volatility has ruled out any issuers doing a deal at short notice at the start of this week. Syndicate officials are clinging to hopes that the Greek parliament will pass austerity measures without springing more surprises, offering enough stability to open a window for borrowers from Wednesday.

The covered bond sector saw only one trade this week, a small German deal from an inaugural issuer — precisely the sort of funding that would be expected to work in a difficult market environment. The outlook for next week does not look much more promising either — although there is a fair chance HSBC will issue its inaugural dollar benchmark.

After recently restructuring its covered bond programme, removing the capacity to issue RMBS, HSBC could price its inaugural US$ benchmark next week. The borrower has been on the road in the US this week with BNP Paribas, HSBC, RBS and Société Générale.

Moody’s has placed five Italian covered bond programmes on review for downgrade along with the long term debt and deposit ratings of 16 Italian banks. Its negative rating action suggests the prospect of a double A Italian covered bond market is nearing.

Investors need to be more aware of how a lack of transparency over issuer taps can adversely affect the performance of covered bonds in the secondary market, Barclays Capital research has said. Market traders find their job more difficult and tend to price bonds wider, which has a knock on effect for bond holders and issuers. The research advises investors to buy-and-hold as a result and to try to participate directly in the taps.

Rating agencies have too much influence over covered bonds and banking systems in general, said Deutsche Bank analysts on Friday. Omitting rating triggers from laws, and limiting the use of rating triggers in prospectuses, they suggested, would help reduce the rating agencies’ influence.

Northern Rock has sold the ‘A2’ notes of its debut RMBS, Gosforth Funding, in a semi-private deal with a margin of 160bp – a relatively cheap level given the pristine collateral and exceptionally conservative prepayment assumptions.