Covered Bonds

The long road to US covered bond legislation took another important step forward this week Tuesday when Republican Scott Garrett introduced the Covered Bond Act 2011. The introduction will be followed by a hearing this Friday in front of the Subcommittee on Capital Markets and Government Sponsored Enterprises.

Spain’s La Caixa has issued its second deal of the year, with several players, including the leads, conceding pricing was quite tight. Nevertheless, with market sentiment remaining strong, there was little sensitivity in the book and the deal worked. Elsewhere CM-CIC priced the first 10-year for several weeks as Banca MPS and Unicaja opened books.

RBS priced its second euro denominated covered bond deal of the year on Tuesday, a transaction notable for its particularly granular book and attractive pricing relative to where it would have funded itself in the senior unsecured market.

Obtaining funding for a single-A rated entity from a peripheral jurisdiction was never going to be a stroll in the park — in senior unsecured it has, at times this year, been impossible. Italy’s Banco Popolare raised Eu1.25bn from a 4.75 March 2016 issue via Banca Aletti, BNP Paribas, Goldman Sachs, RBS and UBS on Tuesday, showing how strategically important the covered bond market is, not just for the issuer, but for the health of the entire banking system.

Skipton Building Society’s Darrowby No 1 is set to be the next UK prime RMBS deal to hit the market. Rabobank is marketing its latest Strong RMBS and Veneto Banca is pricing tomorrow.

The strength of demand for Tuesday’s covered bond deals illustrates that the market continues to benefit from, not just traditional interest, but also wider credit investor participation. This much was already known but what is perhaps more interesting is that relative value to senior unsecured now seems to be less important. This is good news for the covered market, but it is not likely to be welcomed by the FIG sector as a whole as it implies continued cannibalisation of the two markets.

The primary market has got off to a very strong start, with books building on as many as four deals across four jurisdictions. The transactions, which include two tier two borrowers from peripheral markets, have attracted a total of 440 orders worth a combined Eu8bn. The strong showing bodes well for new peripheral tier two borrowers who are said to be lining up with deals this week.

The Australian government’s provisionally indicated cap on covered bond issuance could be raised to 10% of an issuer’s assets, having been mooted at 5% in December last year. However, a decision will not be formally known until this autumn, when draft legislation on the Banking Act is revealed.

Activity in the US market looks set to improve over the next few weeks with two Scandinavians and a first deal from a Canadian issuer lining up.

Spanish and Italian banks are expected to take advantage of the bid for peripheral covered bonds, as witnessed last week by the strength of demand in Banca Carige’s trade, two taps from peripheral issuers and Santander’s blow-out deal. La Caixa has mandated for a four year as other Spanish borrowers line up and Italy's Banco Popolare has mandated.

Recent hawkish comment’s from the ECB president Jean Claude Trichet have helped to boost demand in the Danish covered bond auctions, which entered their second day today.