Covered Bonds

Covered bonds are flavour of the month, partly because investors have dual recourse to both the issuer and the collateral. And the fact there has not been a default since time immemorial gives the impression they are almost infallible — but they are not. That’s why it is important investors take time to look under the bonnet and work out what might happen just in case the unthinkable happens.

The long end of the covered bond primary market is in good shape with Caisse de Refinancement de l’Habitat set to issue a Eu1.75bn 12-year and Abbey mandating for a sterling deal. However, the bid for peripheral bonds is less well placed as sovereign market profit taking sets in.

New and savvier risk takers from both senior and securitisation backgrounds gave their views on covered bond risk to an industry conference last week. Their approach to analysing covered bond risk suggests a more comprehensive and detailed approach to due diligence which could represent something of a sea change from the way traditional covered bond investors assess risk.

Landesbank Hessen-Thueringen GZ had the market to itself on Monday, launching its second floating rate covered bond of the year. Though there was a mandate announcement from Caisse de Refinancement de l’Habitat, primary activity has begun to lessen. Nevertheless, names from further afield are on the horizon, with Portuguese national champions watching the market closely and New Zealand’s Westpac expected in the next few days.

The US Treasury published a draft paper on the prospective unwinding of the Government Sponsored Enterprises, Fannie Mae and Freddie Mac on February 11 stating that it would “work with Congress to consider additional means of advance funding for mortgage credit, including potentially the development of a covered bond market”.

Taking advantage of demand for high coupon peripheral debt, La Caixa yesterday (Thursday) priced a long awaited Eu2bn five year cédulas hipotecárias. Despite the allure of a 5% coupon and a relatively tight spread to its senior unsecured, the trade was by no means a foregone conclusion in the context of underlying sovereign spread volatility.

UBI Banca priced a Eu750m no grow benchmark well inside an initial price whisper yesterday (Thursday). Strong demand for the five year obbligazioni banca garantite took leads by surprise.

Three benchmark covered bonds from Germany and Austria, for a total of almost Eu2bn, were priced this week, while bookbuilding started on a long-awaited Spanish deal and in Italy a new mandate was announced.

Demand for covered bonds from peripheral issuers continues to outpace supply, while access to senior unsecured funding remains poor, and yields to the underlying sovereigns are still attractive.

The merger of several Spanish cajas into a private bank will lead to credit-positive outcomes and the extinction of multi-cédulas, Moody’s said this week.