Euro

Covered bonds were always likely to be eligible assets for Basel III’s Liquidity Coverage Ratio, but when the final wording appeared it turned out to be much better than expected for the product. The long term implications are positive for the asset class, but a near term surge in demand is unlikely, writes Bill Thornhill.

Westpac was set to price the first euro-denominated covered bond of the year on Thursday in a move that is likely breathe confidence into the market, following a disappointing end to 2014.

A large part of a bank’s asset encumbrance is hard to measure and this may lead regulators to focus on one of the most visible and transparent components of encumbrance: covered bonds, according to a paper from the European Covered Bond Council published on Wednesday. The trade association urged European policy makers to take a holistic approach to assessing encumbrance and said a hard encumbrance cap should be avoided.

An updated Dutch covered bond legal framework, which took effect on January 1 this year, brings the law into line with the European Banking Authority’s (EBA) best practice guidelines and European regulations. But, since most issuers already comply with the amendments, the impact is likely to be limited, said analysts from Société Générale’s research team.

Credit Suisse has become the first Issuer to change the terms of its covered bonds from a hard to a soft bullet maturity — on existing deals. The move, which puts investors at a disadvantage, shows they cannot rely on original terms remaining in place through the life of a deal.

The third covered bond purchase programme will not expand the European Central Bank’s (ECB) balance sheet to the extent needed because the market is too small. And spread tightening will not encourage greater issuance, as the ECB expects. The best hope for covered bonds in 2015 is for the ECB to give up on CBPP3 and turn its attention to the sovereign market where it has a much better chance of success.

Scotiabank has tapped its three year sterling FRN for £300m, a day after Barclays issued a £1bn deal in the same maturity. A euro deal could be announced shortly, but bankers warn that the size of the new issue premium needed in euros will present a quandary.

The eurosystem is expected to become a less aggressive buyer of covered bonds if sovereign quantitative easing is announced, according to analysts at Barclays’ research. They recommend investors switch out of peripheral covered bonds into government bonds in the next few weeks.

National Bank of Canada has mandated leads for a roadshow starting next week.

Obligations Fonciére issued by Compagnie de Financement Fonciere and CIF Euromortage were downgraded one notch by Fitch this week following the rating agency’s downgrade of France’s long term rating to AA from AA+.

The outlook for covered bond primary markets is likely to be less clear cut in January 2015 than it was a year earlier, as uncertainty over the timing of a sovereign quantitative easing (QE) programme, the trajectory of US rate rises and an ambiguous political backdrop are likely to complicate price discovery. But with a few more basis points on the table, tier one issuers shouldn’t have difficulty attracting investors.

The European Central Bank is legally obliged to carry out its role as a single supervisor and its responsibility to apply resolution measures will take precedence over its position as a covered bond investor, say analysts at Barclays research. As the central bank has the power to make decisions that could be detrimental to covered bond holders, covered bond supervision should be strengthened.