Covered Bonds

Moody’s took rating action on the covered bonds of three issuers on Monday, downgrading the deals issued by Santander Totta, and Caxia Geral de Depósitos, while placing those issued by Marfin Popular Bank on negative review.

Struggling German bank, WestLB is lining up the sale of its pfandbrief issuing subsidiary, West Immo, to US investment firm Apollo Investment Management. Covered bond analysts suspect the sale will have a negative impact on the ratings of West Immo’s Pfandbrief but the sale is more likely to be a positive for WestLB itself. In any case, West Immo’s covered bonds, which have tightened over the last month, remain well supported.

Existing measures to prevent liquidity risk hamper borrowers’ use of covered bond funding, according to Barclays Capital research. Mechanisms in place to combat liquidity risk in an asset segregation event have not been appropriate to recent events, it said, and can restrict issuers’ use of covered bond funding during critical periods.

Monday was another quiet day for the covered bond market, though syndicate officials remained confident mandates would come. Market participants stressed that covered bonds were not the only asset class where supply was scarce, and were hopeful that as issuers leave blackout and investors become increasingly cash rich, issuance was only a matter of time.

Ratings uplifts for senior long-term debt issued by German Landesbanks could be a thing of the past. Moody’s research suggests the support structures for Landesbanks in distressed situations are not the same in a Basel III, post-crisis world. As a result, the covered bonds issued by some Landesbanks could come under rating pressure.

Fitch has explained how its new covered bonds counterparty criteria, published in March, might affect covered bond ratings of UK banks. The agency sees temporary liquidity shortfalls as the highest risk to covered bond programmes, so UK banks will have to show a commitment to improve their liquidity reserves, or risk a ratings downgrade.

German banks are further reducing cover pool exposure in peripheral European jurisdictions as concerns escalate over the possibility of sovereign debt restructuring.

Korean government officials have long thought that Korea Housing Finance Corp could become a covered bond conduit, issuing deals on behalf of other banks. But a year of talk has yet to yield a transaction and the state-owned corporation has decided to go it alone, selling its second deal backed by mortgages held on its own book.

A new world order in debt markets could soon be ushered in with the first covered bond new issue to be priced through domestic government bonds, investors and bankers were forecasting this week.

Standard & Poor’s on Friday cut public sector backed covered bonds issued by Banco Bilbao Vizcaya Argentaria from AAA to AA+, on negative outlook, because of its criteria concerning the rating of non-sovereign issuers that exceed the rating the sovereign in the European Monetary Union.

Secondary trading has paused for breath lately, but there are still good pockets of liquidity and interest – specifically for French, UK and to a lesser extent Dutch and Scandinavian deals. The primary market could be due another slow week though a French deal is highly likely, with Société Générale tipped as a probable candidate. UK issuers are looking at the dollar market but there is speculation that one is looking at sterling.