Covered Bonds

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

The Canadian government has published a draft consultation paper proposing a legislative framework for covered bonds. It says legislation will create a more robust product than the country’s $30bn structural covered bond market, and one that will retain investor confidence in periods of market instability by providing legal certainty and setting minimum standards. It will also help financial institutions diversify funding.

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.

In a covered market grown accustomed in recent weeks to rare, high quality issuance, market participants had awaited Dexia Municipal Agency’s five year Obligations Foncièrs on Wednesday with some trepidation. The deal was a resounding success however, with 100 accounts participating in the twice oversubscribed Eu1bn no-grow trade.

Germany’s WL Bank restarted supply in the covered bond market on Wednesday, launching a Eu1bn five year deal which, along with a twin five year jumbo from Dexia Municipal Agency the same day, represented the sum total of primary issuance this week. An infrequent top tier issuer, WL Bank followed a recent trend in the covered space towards modest yet well received supply from rare high quality names.

The Canadian government has published a draft consultation paper proposing a legislative framework for covered bonds. It says legislation will create a more robust product that will retain investor confidence in periods of market instability by providing legal certainty and setting minimum standards. It will also help financial institutions diversify their sources of funding.

In a covered market dominated in recent weeks by rare and high quality issuance, market participants had awaited Dexia Municipal Agency’s five year Obligations Foncièrs with some trepidation. The deal was a resounding success however; with 100 accounts participating in the twice oversubscribed Eu1bn no grow trade.

Though primary supply slowed on Thursday the success of twin Eu1bn five year deals from WL Bank and Dexia on Wednesday proves the market remains receptive. Germany’s WL Bank convinced more than 100 accounts to participate in a no grown benchmark trade on Wednesday, which was well received by domestic and foreign investors.

Peripheral sovereign bond investors are anxiously recalibrating their exposures and rapidly coming to the conclusion that they would have been better off buying covered bonds. With Greece’s debt spiralling out of control and growth prospects looking dimmer by the day, a restructuring of its debt is drawing closer. And where it goes, others may follow. Despite that, sovereign debt is considered an eligible level one asset under Basel III. This makes no sense relative to covered bonds which, being a level two asset, have many more restrictions despite their generally higher ratings and better recovery prospects.

Credit Suisse will roadshow in the US next week, ahead of its inaugural dollar covered bond issue. US investors will jump at the chance to buy paper from a strong European name, and a hefty order book might encourage other European banks to debut in a market that entered 2011 with high expectations.

Dexia Municipal Agency brought a second Eu1bn no grow five year deal to market on Wednesday, after the publication of positive first quarter results. The trade was well received by investors, allowing leads to price inside of guidance on the back of a Eu2bn order book.

Primary market activity restarted on Wednesday, with WL Bank launching a Eu1bn five year deal. An infrequent top tier issuer, the borrower follows a recent trend in the covered market towards well received supply from rare high quality names.