Euro

Issuance of benchmark Pfandbriefe is expected to increase slightly next year, but with private placements set to decline more sharply, the overall size of the German covered bond market will shrink, said the German Association of Pfandbriefbanks (VDP).

The pace of covered bond purchases is likely to slacken next year due to natural market forces, but also because the European Central Bank’s focus will turn to sovereign bond purchases, said Commerzbank analysts in their 2015 outlook published on Wednesday. Despite estimating a €15bn annual decline in supply to €100bn, new regulations which require banks to focus on capital rather than funding will not be overly negative the analysts said in a report published on Wednesday.

European covered bonds are expected to benefit from strong and increasing regulatory support and an improving sovereign outlook, said Moody’s in its covered bond outlook for 2015. However the positive credit view takes no account of market value which remains negative.

The European Central Bank increased its purchases of covered bonds in the secondary market last week as primary activity remained subdued, but the increase has only had a marginal impact on spreads.

Mediobanca and UniCredit could see their covered bonds drop to A- after Standard & Poor’s downgraded the Italian government by one notch to BBB-.

Covered bond investors continue to be concerned about the European Central Bank’s third covered bond purchase programme, as the intervention appears to be pushing private money out of the market. Central bank allocations in recent deals have been up to 60%, and at least one cornerstone investor is gradually exiting the market.

Covered bond harmonisation must be ambitious rather than lowest common denominator, or there is little point in the project, according to a presentation at the Association for Financial Markets in Europe / Verband deutscher Pfandbriefbanken covered bond conference in Berlin.

This week the ECB scaled back buying in the primary covered bond market and gave the private sector a chance to set the price.

After a string of lacklustre covered bonds, the primary market found its mojo on Wednesday as Cassa di Risparmio di Parma e Piacenza (Cariparma) issued a larger and longer Obbligazioni Bancarie Garantite than its closest comparable. Despite a weak secondary market, the issuer was able to attract a book that was driven by private sector demand for its first public deal, because pricing was fair and was defined from the start of the bookbuild.

Cassa di Risparmio di Parma e Piacenza (Cariparma) has mandated leads for its inaugural Obbligazioni Bancarie Garantite, which is set to launch tomorrow following the roadshow which was finalised on Monday.

Standard & Poor's upgraded the Ireland-based but German-owned Depfa Bank PLC to 'A-' from 'BBB' with a stable outlook on Monday. The state-owned bank can soon be considered a Government Related Entity (GRE) and will benefit from increased state support following a transfer of its ownership.

The once beleaguered multi-Cédulas sector may well be a safer asset class to invest in because, over the last year, overcollateralization (OC) ratios have increased, said Fitch.