Currencies

Aktia Bank Finland priced its Aaa-rated €500m no-grow deal on Tuesday, in what can only be described as a straightforward well prepared transparent process. In contrast, Banco Popular Espanol came to market with a less prepared €1bn, Baa1-rated offering in an over supplied part of the curve, just as peripheral sovereign volatility spiked higher. Nevertheless, with an attractive concession, the Spanish issuer got a fair result.

The euro/dollar exchange rate’s correction following last week’s Federal Open Market Committee meeting provided an ideal opportunity for LBBW to tap its March 2018, Reg S dollar benchmark on Monday. In the meantime, Aktia Bank announced plans to open books on Tuesday for a €500m seven year, which is expected to benefit from Moody’s recent change in its rating methodology.

Aktia Bank has a strong liquidity position, good asset quality and solid capital ratios, but as one of Finland’s smaller banks it has a low market share and as such, faces a fiercely competitive environment, said analysts at LBBW research on Friday.

Sentiment again improved in covered bonds on Friday and followed a more stable tone in credit markets on Thursday afternoon. The recent glut of long dated supply has begun to ease with spreads tightening. However forthcoming issuance may now move towards intermediate maturities where a solid reception is more likely.

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.

Covered bonds are dual recourse and backed by a dynamic collateral pool that ensures their highest quality at all times. In contrast RMBS are backed by a static pool, and because the instrument is non-recourse, the issuer in extreme circumstances would probably not be allowed to support the deal. For these and other reasons, the regulatory treatment of Van Lanschot’s conditional pass through (CPT) covered bond is justified as it is a safer instrument than Rabobank’s RMBS, says covered bond consultant Richard Kemmish in response to an opinion piece published by The Cover suggesting the oppposite.

The covered bond market began to stabilise on Thursday as bankers digested details of the Federal Open Market Committee (FOMC) meeting. The predominant mood was positive and, after a few days of consolidation, the new issue market is expected to resume next week. And, with the European Central Bank expected to maintain buying momentum, the first zero yielding covered bond could be seen within a few weeks.

ABN Amro has confirmed that the conditions have been met for it to change the terms of six outstanding covered bonds from hard to soft bullet. However, the required quorum to change terms was not met for two deals and eligibility conditions were not satisfied for another two deals.

Nationwide and Caixabank launched long dated deals on Wednesday. Even though both trades were fairly priced, this part of the curve was heavily supplied. The deals also suffered from a widespread market malaise, partly stemming from renewed concerns over Greece. But Nationwide's was undoubtedly the stronger deal, being more appropriately sized and priced. It was also placed with high quality private investors, in stark contrast to the Spanish deal.

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.

Fitch and Moody’s have interpreted Spain’s new bankruptcy regime differently, though according to DZ Bank covered bond research analysts, both agencies see elevated credit risk in Spanish cover pools relative to international standards.

Rabobank’s Obvion subsidiary sold nearly €2bn of five year RMBS last Thursday, at a considerable spread pick up to where Dutch pass-through covered bonds from entities with much weaker ratings would be expected to price. The deal, originated by one of the best rated banks in the world and backed by very high quality collateral, suggested that covered bond investors could be missing out by not looking at the RMBS market.