Covered Bonds

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 Eu13bn this week ahead of potential additional volume today (Friday) — was threatening to overwhelm the sector.

UniCredit this week sold a Eu1.25bn 12 year benchmark off the back of a Eu4.6bn orderbook, the largest ever for an Italian issuer. Bolstered by the pull of a rare maturity that is being increasingly favoured by investors due to the regulatory environment, the transaction’s reception was, in the words of one syndicate official, "overwhelming".

For the second straight day there has been primary issuance across the curve in covered bonds. Nordea Bank Finland is the latest name to come with the popular 10 year tenor, while Intesa Sanpaolo — the third Italian issuer in as many days — is in the market with a five and a half year benchmark. And the Spanish resurgence continues, with Banco Sabadell launching a two year cédulas hipotecárias — which is expected to benefit from residual demand left over from Banco Bilbao Vizcaya Argentaria’s heavily oversubscribed deal on Tuesday.

Just over one third of all benchmark issuance in January came from France, considerably more than the second most prolific region Germany. Sterling makes a small but significant appearence in issuance by currency. And around a third of all benchmark issuance came at the longer end of the curve, 10 years and beyond. In terms of total issuance January 2011 was far in excess of January 2010, and was only slightly less than half the total benchmark issuance in 2008.

These charts and tables provide an overview of covered bond issuance in January 2011 , breaking down total supply by country, currency, and maturity, and comparing this month's volumes with those of previous months and years.

Banco Bilbao Vizcaya Argentaria’s five-year cédulas hipotecárias was a seminal deal, not only in the history of covered bonds, but in the way the market relates to the wider Supra Sovereign Agency sector and credit markets. The sheer size of the book, along with the number and type of accounts, illustrated beyond any doubt that the covered bond market has moved from its almost quirky and provincial origins to centre stage in global bank financing.

Lead managers ABN Amro, JP Morgan, Rabobank and Royal Bank of Scotland will offer the five year senior notes of ABN Amro’s Dolphin 2011-1 at 140bp over three month Euribor, the wide end of the 135bp-140bp price talk released on Tuesday. The publically offered tranche is expected to be a Eu500m five year euro piece, and pricing will be later on Thursday. Santander placed its RMBS largely with real money accounts.

Too much of a good thing? With so little senior unsecured and RMBS, the bank finance market is in danger of becoming over-reliant on covered bonds. This could create dangerous imbalances.

The primary market continues to steam ahead with BBVA’s latest five year deal proving the major talking point, after it built an astounding book, by far the largest of any deal this year. CM-CIC and Banca Monte dei Paschi di Siena are also in the market with three and seven year deals respectively.

Holmes 2011-1, the UK’s first RMBS this year, should be at least £2bn equivalent in total, thanks in part to a Eu650m preplaced three year euro tranche, which sponsor Santander has added since Tuesday’s investor update.

The UK insurance bid, first properly tested with Nationwide’s 15-year sterling deal, was again reaffirmed with Lloyds TSB’s latest funding exercise. The transaction was notable for being the longest, and carrying the highest coupon, so far this year – as well as for being significantly larger than the Nationwide’s and for attracting almost double the number of accounts.