Euro

The European Covered Bond Council has proposed a new generation of secured funding notes, halfway between covered bonds and securitizations. But getting them off the ground is still in the hands of the regulators.

Fitch has put the £1.1bn of covered bonds issued by Clydesdale Bank on Rating Watch Negative (RWN) after its parent National Australia Bank said it intended to proceed with a sale of its subsidiary.

The long end of the French, Belgian and Dutch covered bond market is effectively closed for primary issuance because the rout in government bonds has made them too expensive. But bankers are hopeful that, with careful consideration of tenor and pricing, benchmark issuance should eventually return in shorter tenors, though probably not until June.

Kreissparkasse Koeln (KSK Koeln) has named lead managers for an eight year covered bond. The bank has issued two previous covered bonds, but this is the first time it is targeting investors outside of the German savings bank network. The deal is expected in the near future.

Moody's recent negative rating action on Pfandbriefbank, Hypo Vorarlberg, Hypo Tirol and Hypo Noe has failed to have any impact on their covered bonds. After coming under severe pressure three weeks ago most Austrian covered bonds have rebounded beyond levels that were seen just before negative headlines first appeared. But Komunalbank’s euro deals have not and could still perform.

Sparkasse Koelnbonn is meeting investors from May 18 for what is becoming its annual €500m bond issue. While the deal will only go live subject to investor feedback and market conditions, bankers are expecting a five to seven year transaction the week after next.

Ålandsbanken is lining up to price a €250m covered bond and is meeting investors in Europe from May 5 – 12. This will be the Finnish bank’s largest covered bond to date.

The sharp rise in Bund yields has caused huge mark-to-market losses, effectively wiping out the lifetime coupon payments of any seven to 10 year fixed rate covered bonds bought in recent weeks. Markets appear to have temporarily stabilised, but underlying uncertainty may temper demand for fixed rate bonds suggesting the floating rate market could offer a better alternative.

Covered bond bankers and investors reacted with scepticism to the European Covered Bond Council (ECBC)’s proposed new dual-recourse bond structure. The lack of standardisation across SME reporting means that using them in the collateral pool will be problematic. In addition, even if these concerns are ironed out, issuers will have to pay up for the product, something which makes little sense in such a low cost environment.

Bankers are preparing the ground for the first Turkish covered bond with both Akbank and Garanti Bank preparing extensive investor roadshows. Batuhan Tufan, head of funding at Garanti Bank, told The Cover on Tuesday that he is confident supply will sell. However syndicate bankers question whether issuance will fit more closely with emerging market, or covered bond investor portfolios. In any case pricing is expected to be wide of the sovereign.

Bund yields, which have soared over the past week, began to stabilise on Tuesday, leading to optimism about the return of real money to the covered bond markets.

The relative value of covered bonds compared to sovereign bonds has improved, but the pace of European Central Bank buying has not slackened, as had been widely hoped. And even though the ECB has marginally scaled back primary market purchases this year compared to last, it remains an aggressive secondary market buyer.