Covered Bonds

Miami, FL

Banque AIG on Friday breached a Moody’s rating trigger in its role as liquidity facility provider for Cédulas TDA 5, FTA. However, the cédulas ratings have so far remained untouched by the breach.

While there have been no discernable efforts to introduce covered bonds in Brazil, the country on paper seems like an ideal candidate for issuance, with its huge housing deficit and a legal framework that is said to lend itself to structuring the instrument. The Cover examines whether they are likely to displace or complement other funding sources in the Latin American country.

In brief: Chelsea Building Society has executed the first covered bond issue under a Eu5bn programme, a £1.25bn three year deal. Meanwhile Alliance & Leicester has printed its second issue.

Fitch has held off taking action on Hypo Real Estate Bank AG’s Pfandbriefe to give the bank more time to address the rating agency’s concerns. The bank yesterday (Thursday) afternoon said that it was maintaining its rating watch negative on the covered bonds since it had said two weeks ago that it would be taking action as a result of its review this week.

Higher levels of overcollateralisation are likely to be required of issuers to achieve a given covered bond rating as the result of an update to the way in which Fitch assesses the risks investors face from potential liquidity gaps in the event of an issuer default.

The UK’s Lloyds TSB gave the banking sector a surprise lift this morning by announcing a benchmark senior unsecured 10 year sterling issue that is not being launched under the guarantees recently extended to many European banks’ short dated issuance. The £400m deal promises an unexpectedly quick resumption of financial institutions issuance and, by showing that unguaranteed issuance has an immediate role in bank funding, is a positive sign for the covered bond market.

UniCredit has put the final touches to its Eu20bn Italian covered bond programme and executed its first issues. While these have been retained, the bank is now ready to issue publicly when the market reopens.

Moody’s today (Thursday) assigned definitive Aaa long term ratings to the outstanding cédulas hipotecarias issued by Cajamar - Caja Rural, Sociedad Cooperativa de Credito.

Any covered bond activity this week has been overshadowed by the Eu920bn question: where will government guaranteed bank debt be priced? Until this question is answered, the likely volumes of such issuance will not be clear and the implications for other asset classes cannot be assessed.

After the outcry over Moody’s two covered bond downgrades on Tuesday, The Cover spoke to the rating agency to find out the thinking behind them. But rather than focus on its much-discussed timely payment indicator, Moody’s instead offered a refresher course on other elements of its methodology.