Euro

A majority of covered bond investors polled by Fitch in December 2014 say the market’s greatest challenge is decreasing secondary market liquidity. The rating agency expects the most pronounced illiquidity from June 2016, which could feed through to the credit quality of covered bond programmes, as refinancing becomes more difficult.

The larger than expected quantitative easing programme announced by the European Central Bank on Thursday has turbo-charged the well-established bull flattening trend in covered bonds and trading volumes have tripled from earlier in the week. With the long end of French market now offering a tempting spread to OATs, real money buyers are set to return. And with Bonos and BTPs rallying hard, relative value between covered bonds and sovereigns should soon be restored in the Cédulas and Obbligazioni Bancarie Garantite markets.

NordLB will start engaging with investors from mid-February regarding plans to sell its Lettre de Gage Publique. The issuer may also update investors about its merger plans, which could ultimately result in a wider pool of assets being financed under the Luxembourg covered bond law. Around the same time Goldman Sachs is likely to be reconsidering how to approach the market with its FIGSCO deal. The two issuers’ very different approaches show there is still great scope for innovation in dual recourse instruments.

Moody’s upgraded 12 Italian and Spanish covered bonds into “Aa” territory after the close on Wednesday, taking the bonds from category 2A to 1B in the liquidity coverage ratio (LCR). Though this should theoretically improve bank demand, last week’s LCR impact study published by the European Banking Authority (EBA) showed most banks had already met their minimum LCR requirement, suggesting scope for an improvement in appetite will be limited.

If Wednesday’s leaks prove true, and the Eurosystem buys €50bn of sovereign bonds per month from March 2015 to December 2016, the total €1.1tr package is larger than expected. Government bonds should therefore outperform and this will restore relative value by making covered bonds look comparatively cheap, said analysts.

Canadian Imperial Bank of Commerce opened books for the third Canadian benchmark issued in euros this year. The transaction priced tighter than its peers with no new issue premium, though it was still comfortably oversubscribed. The strong result suggests potential for spread narrowing between eurozone and non-eurozone covered bonds.

The European Commission wants credit ratings left out of financial regulation — a great move, if it can find something good to replace them. But it’s making the right decision for the wrong reason. Upset at the presence of sovereign rating caps the EC has thrown a hissy fit in its final version of the Liquidity Coverage Ratio, and suggests that jurisdiction should not be a part of the credit quality of covered bonds — a view that will come as a big surprise to anyone investing in them.

Portugal’s Caixa Geral de Depósitos (CGD) issued a €1bn seven year covered bond, the longest seen from any Portuguese issuer in four years. And at 1% it was also the lowest coupon ever paid by a Portuguese covered bond issuer. The comfortably oversubscribed deal offered a new issue premium of 3bp to 4bp. However, rival bankers said the spread looked unattractive relative to government bonds which are should benefit from prospective central bank buying.

Covered bond issuers from outside the Eurozone launched deals this week denominated in sterling and Australian dollars. But a bigger proportion were from the Eurozone where borrowers launched deals in the single currency in maturities that ranged from four to 20 years. The transaction were priced generously and enjoyed a solid reception, with central banks taking a back seat.

The covered bond primary market maintained robust momentum on Thursday as another four issuers priced deals. The seven year tenor remains the firm favourite with two new trades on Thursday taking the total to eight this year.

Bank of Montreal (BMO) and Caisse Française de Financement Local (Caffil) respectively issued one of the shortest and longest covered bonds of 2015. BMO’s five year appealed to a wide audience enabling the borrower to issue a large €1.5bn deal. Though Caffil’s €500m 20 year appealed to a smaller audience, the very high quality investor base it appeals to bodes well for the deal’s long term performance.

Sekerbank is holding investor meetings for a covered bond which will be the bank’s first ever publicly syndicated deal targeted at investors in the private sector mainly in Europe. The deal takes advantage of the amended law which allows for greater use of derivatives in the cover pool.