Currencies

As the first half of the year draws to a close, the original 2010 predictions for total covered bond issuance in 2011 from most analysts appear exceptionally conservative. Several analysts have revised their estimates, and predictions for covered bond issuance over the next six months are in the Eu80bn-100bn range.

The Greek parliament met market expectations yesterday and approved the austerity bill, ushering in a period of mild relief however temporary it turns out to be. Secondary market flows picked up, particularly for Spanish cédulas which showed stronger buying interest. But covered bond syndicate officials do not expect a long window for primary issuance. CRH and OP bank have been quick to take advantage of the more positive mood with the former raising Eu1bn of 11 year funding via a tap and the latter mandating leads for a seven year to be priced tomorrow.

The covered bond sector saw only one trade this week, a small German deal from an inaugural issuer — precisely the sort of funding that would be expected to work in a difficult market environment. The outlook for next week does not look much more promising either — although there is a fair chance HSBC will issue its inaugural dollar benchmark.

Investors need to be more aware of how a lack of transparency over issuer taps can adversely affect the performance of covered bonds in the secondary market, Barclays Capital research has said. Market traders find their job more difficult and tend to price bonds wider, which has a knock on effect for bond holders and issuers. The research advises investors to buy-and-hold as a result and to try to participate directly in the taps.

Abbey, Compagnie de Financement Foncier (CFF), Dexia Kommunalbank AG, Erste Bank, La Caixa and UniCredit all made presentations to UK based investors at an event sponsored by Crédit Agricole CIB this week. Whilst it was clear that many issuers are well advanced in their funding for this year, and seem to have plenty of liquidity to draw on, it is also clear that when the funding window re-opens, issuance is likely to take-off.

Guaranteed residential home loans used as collateral for French Obligation à l’Habitat could be riskier assets than residential mortgages during a severe economic downturn, despite lower loss given default values.

The conversion of French structured covered bond programmes into the Obligation à l’Habitat (OH) format is causing confusion in the index world, said LBBW analysts. French iBoxx covered indices have become less representative of a clearly defined market segment, the research said, and iBoxx is currently discussing whether to create a new sub-index for the OHs.

BNP Paribas’s Dutch RMBS, Phedina 2011-1, was fully covered at Friday’s guidance of 90bp-95bp for the two year ‘A1’ tranche and 130bp-135bp for the five year ‘A2’ tranche, with more orders coming in on Monday morning.

The covered bond market remained inactive on Monday. Though several issuers have deals to bring, the environment has not become any more receptive to issuance. Fears of contagion from Greece rule out peripheral supply, and one syndicate official on a prospective trade from a core name said he had advised delay.

Issuers are waiting for some better news out of Greece before deciding whether to press on with transactions, despite most receiving strong interest during roadshows. After selling in the secondary market on Thursday, sovereign spreads on Friday tightened on rumours of an aid package for Greece. But with market sentiment yo-yoing from one day to the next, any window for issuance before the summer lull is likely to be narrow, and perhaps too risky for first time euro borrowers such as ANZ Bank.

Covered bond analysts have turned their attention to rising house prices in Scandinavia, following a report by Standard & Poor’s, which warned that rising private sector debt to GDP levels, fuelled by increased mortgage borrowing, could present a danger to banks and their assets in the event of a severe economic downturn.

There were few indications that a success was on the cards, given that Sampo’s Eu1bn ten year struggled and that market volatility had scared off other issuance this week but Aktia Real Estate Mortgage Bank’s Eu500m five year trade on Wednesday attracted enough investor interest to warrant an increase.