Covered Bonds

Sovereign risk is the greatest challenge for the covered bond market, investors told Fitch’s latest market survey.

Deutsche Postbank has mandated joint leads Citi, Deutsche Bank, DZ bank, UBS and Unicredit for what is likely to be one of the easiest selling deals of the year, thanks to its rarity value and the sponsorship of the domestic investor base.

Scandinavian issuers are positive about the covered bond market and expect an improvement in the next quarter, according to latest research.

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

The primary market has slowed to a standstill today, though transactions are in the pipeline and could be due this week — including some new names. In the secondary market, the peripheral sovereign sector has softened but the bid for peripheral covered bonds continues to look well placed.

Lead managers ABN Amro, JPMorgan, Rabobank and Royal Bank of Scotland sold the five year senior notes of ABN Amro’s Dolphin 2011-1 on Thursday, pricing the Eu500m piece deal at 140bp over three month Euribor, the wide end of the 135bp-140bp price talk released on Tuesday. The deal was 1.3 times covered, and like Holmes (see separate story) real money investors dominated.

Intesa Sanpaolo yesterday (Thursday) priced its second deal of the year, which was, at Eu2.5bn, the largest covered bond since 2008 – a size that was justified by the huge well of real money demand. Despite its less usual structure, the transaction priced close to its outstanding.

Benefitting from a massive change in underlying sentiment Banco Sabadell yesterday (Thursday) raised Eu1.2bn when only a week earlier it had been unable to muster much more interest than Eu300m. With around 80% allocated to real money investors, leads judged that a relatively small oversubscription was needed to ensure performance on what is the second cheapest deal of the year.

Nordea Bank Finland priced a Eu1bn 10 year yesterday (Thursday) on a modestly oversubscribed book but one that was nonetheless good quality. Though clearly not in the same league as multiple-times oversubscribed competing peripheral deals, the eye-watering print of plus 55bp perhaps demonstrates the strength of the credit.

UK institutions’ sudden and unexpected emergence as key buyers has lifted the covered bond market to new heights, just as this year’s tidal wave of supply — already up another Eu13.7bn this week — was threatening to overwhelm the sector. But banks’ increasing reliance on the product could create long-term funding imbalances, sector specialists warn.

Banco Bilbao Vizcaya Argentaria’s five year cédulas hipotecárias was a seminal deal, not only for the covered bond sector, but also as an indication of the way the market relates to the wider sovereign, supranational and agency sector and credit markets.