Austria

The Bundesbank and European Central Bank have been actively lifting offers in Austrian covered bonds, with all bar one credit performing strongly since the end of March.

The spread between the weakest and strongest covered bonds is tighter than at any point in the last five years, thanks to the European Central Bank’s backstop bid. But just because the ECB is willing to buy anything and everything that qualifies as a covered bond, that doesn’t mean investors should.

The Austrian state of Carinthia announced that it will provide a line of liquidity support to Austria’s Pfandbriefstelle. The decision suggests a slight improvement in the negative political backdrop dominating Austrian banks. Despite continued concerns, the recent sell-off has thrown up relative value opportunities, said analysts.

The technically Aa3-rated euro covered bonds of Kommunalkredit, now under the stewardship of KA Finanz, have widened from mid-swaps flat to 50bp this week as forced selling followed speculation that the rating contract with Moody’s could be void. But, in light of the support that covered bond ratings of wind down entities have historically enjoyed, there is a hope that Austria will see the sense in supporting the covered bond rating. However analysts warn that the bonds still face substantial risks.

Sentiment in the European covered bond market was softer on Tuesday ahead of the US’s Federal Open Market Committee (FOMC) meeting. And after a strong rally this year, real money accounts have been taking profits ahead of the end of the first quarter of the year. Austrian covered bonds have underperformed the most as negative headlines have compounded the generally bearish mood.

A partial sale of Kommunalkredit to a new company, KA New, is likely to lead to lower credit ratings for the bank’s Swiss franc-denominated covered bonds. However its euro-denominated covered bonds will remain in the wind down entity, KA Finanz, and should be better protected, said Commerzbank research on Monday.

A partial sale of Kommunalkredit to a new company, KA New, is likely to lead to lower credit ratings for the bank’s Swiss franc-denominated covered bonds. However its euro-denominated covered bonds will remain in the wind down entity, KA Finanz, and should be better protected, said Commerzbank research on Monday.

German banks have a larger exposure to Heta Asset Resolution — the bad bank of Hypo Alpe Adria — than Austrian banks, said Fitch on Thursday. Despite this, Fitch thinks losses should be manageable. Research from NordLB, also released on Thursday, shows the distribution of this risk across German Pfandbriefe cover pools.

Fitch put Duesseldorfer Hypothekenbank’s (DuessHyp) BBB- rating on Watch Negative and downgraded its Viability Rating (VR). The bank urgently needs capital, which should ultimately be available from the German government, said the ratings agency. It may be the latest example of the fallout from the Austrian state of Carinthia’s decision not to honour the guarantee of Heta Asset Resolution's unsecured bonds.

Deutsche Pfandbriefbank (pbb) and Dexia Kommunalbank are both exposed to bonds which are likely to be written down following the debt moratorium issued by Heta Asset Resolution — the Hypo Alpe Adria bad bank — last week. Several other German covered bond issuers are likely to be affected, said Commerzbank analysts. Austrian issuers are also being hit and have been put on review for downgrade by Moody’s.

The Austrian Financial Markets Authority (FMA) said on Sunday that it will proceed with a resolution of Heta Asset Resolution AG (HAR), the state-owned wind down company responsible for disposing of the non-performing assets of Hypo Alpe Adria (HAA). The process is expected to provide the first practical test of the covered bond market’s exemption from bail in said analysts at Deutsche Bank.

Despite a string of successful Austrian covered bonds launched recently, Commerzbank analysts are cautious on the outlook for Austrian banks. The analysts list a number of risks and conclude that there is still a substantial chance of more negative headlines emerging in the next few months.