Euro

Since Goldman’s FIGSCO (Fixed Income Global Structured Covered Obligation) trade hit the screen, capital markets commentators, The Cover included, have been scratching heads and stroking beards about what it actually is.

Toronto-Dominion Bank could become the next Canadian bank to issue a covered bond after it received regulatory approval from the Canada Mortgage and Housing Corp (CMHC) this week. The sign off comes weeks after Canada set out guidelines on the liquidity coverage ratio.

Goldman Sachs may have been hoping that it could get away with calling its newly structured triple recourse hybrid a covered bond. Though it is being marketed to covered bond investors, FIGSCO is clearly nothing like a classical covered bond. But Commerzbank, NIBC and NordLB all encountered controversy when they successfully issued innovative deals, suggesting the clumsily named acronym may be a success – especially in an environment of furious yield chasing and a shrinking triple A universe.

The long end of the covered bond market has outperformed for many months, but even more so over the last two weeks. Bankers expect the rally to continue even though yields are now approaching their lowest in five years, and a point where major trend reversals have previously taken place.

A week of no new issues in the covered bond market has confused some market participants, coming straight after the second busiest week of the year. But, at quarter end and with holidays around the corner, banks’ decisions over participation in the ECB’s targeted longer-term refinancing operations (TLTRO) programme — coupled with anticipation of a liquidity coverage ratio (LCR) announcement from the EBA— may be what is muting primary issuance.

Austrian covered bonds were steady on Tuesday after a swathe of Moody’s senior downgrades hit covered bonds, leading bankers to say its methodology has serious weaknesses. Separately, Standard & Poor's upgraded €27bn of multi-Cédulas in a move which analysts said would have little impact and could soon be reversed. The fact multi-Cédulas have outperformed Austrian covered bonds all year is due to the other factors.

The covered bond market got off to a restrained start on Monday with syndicate bankers noting that some borrowers were looking at possible issuance this week, with a view to taking advantage of strong credit market conditions ahead of the summer break. Meanwhile, Goldman is on the road from Wednesday with its controversial hybrid FIGSCO issue.

Two or three core issuers have deals lined up for next week, bankers told The Cover on Thursday morning. The market has successfully absorbed the surge in supply following the ECB announcement on June 5, and deals issued just before the ECB have tightening drastically, following the rest of the fixed income market.

Westpac New Zealand paid the tightest spread, the lowest coupon and drew one of the most granular order books for one of the largest ever covered bonds from the region. Jim Reardon, who is head of funding at the bank, told The Cover on Thursday that the success of the deal was driven by the new legislative framework — a fact that other New Zealand issuers will want to take advantage of.

Nationwide opened books on Wednesday for the first post-crisis UK dual tranche covered transaction, and only the second from any jurisdiction this year. The success of the deal may establish dual tranche syndication as a benchmark for those issuers looking to raise size without compromising execution.

Nationwide has mandated leads for the third UK covered bond in euros this year. Though a firm decision on structure and tenor has not been taken, the issuer is testing appetite for a dual tranche offering that could involve the longest dated issuance seen in euros for years, to be launched Wednesday.

Berlin Hyp opened books on Monday for a deal which gave a positive litmus test on the condition of the core Pfandbrief market. The issuer may have been able to price a €500m deal at flat to Euribor but opted for a more liquid size at 1bp over mid-swaps in a move that was applauded but which shows resistance to sub-Euribor pricing has yet to be broken.