Euro

Covered bonds and RMBS share important similarities which both the European Central Bank and Bank of England acknowledged last year in a discussion paper. As the two asset classes evolve, their vastly different regulatory treatment should become more difficult to justify. A comparison of Rabobank’s Storm 2015-1 RMBS, originated by its Obvion subsidiary, to a forthcoming conditional pass through covered bond to be issued by Van Lanschot Bankiers shows that regulation remains a more important determinant of price than fundamental credit risk.

The Netherlands has become the first country to comply with best practice guidelines proposed by the European Banking Authority last year, and on Thursday the Dutch Finance Ministry had the opportunity to showcase its covered bond regime at the European Covered Bond Council’s (ECBC) plenary meeting in Amsterdam. The ministry took the opportunity to stress the importance of maintaining diversified sources of funding and the need for consistent regulatory treatment between the covered bond and securitization markets.

WL Bank can usually be counted on to succeed where others are less fortunate but on Wednesday the German issuer tempted fate with its decision to price a 12 year benchmark. With this deal seven of the last 10 covered bonds have had maturities of 10 years or longer, where demand is more limited and more sensitive to price.

Swedbank became the seventh issuer to price a sterling three year covered bond FRN this year, launching a £500m deal on Wednesday. This is the third transaction from an overseas covered bond issuer in sterling and shows the attractiveness of the basis swap, particularly after the surprise reate cut in Sweden.

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.