Covered Bonds

UK prime RMBS from Northern Rock and Royal Bank of Scotland have achieved good momentum, with a total of around £2.8bn placed in the market on Wednesday, and healthy oversubscription. But spreads are moving sideways rather than tightening, Northern Rock paid a plentiful premium, and RBS moved to the wide end of guidance.

Yorkshire Building Society’s successful £750m seven year print proved the sterling market is receptive to short as well as long tenors. The split rated, short dated deal was priced at the tight end of guidance while reaching maximum deal size, and in its wake Coventry Building Society has begun roadshowing an inaugural triple-A rated sterling covered bond to UK investors.

The momentum around long dated core supply rumbles on, with Compagnie de Financement Foncier launching a Eu1bn 10 year benchmark deal on Wednesday. The deal comes amidst some talk that it was not the easiest sell and a continued widening of French paper relative to German. But with the outlook for France stable and a new law set to enhance structured deals, France’s dominance of the covered market looks unthreatened.

With some Triple-A non-conforming ABS performing better than covered bonds from peripheral Europe, you'd be forgiven for thinking that securitisation was back in favour with regulators. But the preferred status of covered bonds remains hard to shift. The ABS world needs to start speaking with one voice if it wants to be heard.

Portuguese covered bonds are currently offered in the secondary market with no bid amid spread indications that are broadly wider by 30bp-40bp since Friday’s close. By contrast, a line in the sand has been drawn under the problems of Irish banks, which have quantified their expected losses and their covered bonds are starting to see interest in small clips of Eu2m-Eu3m.

Northern Rock has increased the size of the offered tranches in Gosforth Funding 2011, going from £370m equivalent to nearly £600m on the back of exceptional demand for the euro notes. The A1b euro tranche is 2.5 times covered even at the new size of Eu450m, and the A1a sterling tranche is twice covered for a size of £200m.

The claims of covered bondholders on the cover pool should not be affected by a bank bail-in and issuers should formalise their reporting across a consistent standard, the UK’s Financial Services Authority and HM Treasury said in a joint review and consultation paper on UK covered bond regulation, published on Wednesday. The move comes in tandem with similar initiatives by the Covered Bond Investor Council and the ECB.

UK issuance continues to flow, favoured by analysts and bolstered by a growing domestic bid. Barclays Capital came to market on Wednesday with a successful five year deal in euros. Q1 supply from the UK has been double that of the previous year’s first quarter total, and represents 10% of all covered bonds issued in 2011.

Irish covered bonds have outperformed all others in the recent past, reflecting increased certainty over the size of the country’s bank bail-out. This position contrasts with Portuguese covered bonds, which remain bogged down by the sovereign’s problems, despite the fact current weighted average LTVs are much lower. Though Spain has been one of this year’s success stories, selective cédulas have underperformed after multi-notch downgrades.

Caisse de Refinancement de l'Habitat sold a Eu700m increase of a 4.5% 2023 issue on Monday via leads Barclays Capital, HSBC, and UBS. The increase comes as Fitch announced a stable outlook on the French banking sector which has in aggregate completed 20% of this year’s funding need ¬– mostly in covered bonds.

Jens Tolckmitt, chief executive of The Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken,vdp) talks to The Cover about recent amendments to the Pfandbrief Act and how these dovetail with the Association’s own initiatives. Transparency requirements have been fine tuned to enable like-for-like comparison between different cover pools. New powers have been granted to the cover pool administrator, laying the basis for it to issue Pfandbrief and access repo funding – thus avoiding reliance on onerous third party liquidity arrangements and ensuring full and timely payment post- insolvency.