Euro

Declining Spanish covered bond issuance has resulted in higher levels of overcollateralization, said Moody’s on Tuesday. This is credit positive because bondholders are better protected.

After a weak open covered bond market sentiment began to improve on Monday as sovereign markets showed signs of stabilising. Though the outlook could remain unsettled until this Thursday's European elections, the longer range picture is constructive and the natural bias of flow is to the buy-side, bankers told The Cover on Monday.

Landesbank Hessen-Thueringen (Helaba) mandated leads for a dual tranche triple-A rated public sector Pfandbrief on Monday, for launch on Tuesday.

Spanish bank Kutxabank took advantage of improving conditions after a dismal open on Monday to issue the country’s fourth covered bond of the year. Following Swedbank and Bank of Austria last week with a seven year tenor, the deal is the first such tenor from Spain this year and a clear indication of where the sweet spot on the curve lies.

With a sizeable portfolio of variable rate mortgages, it makes sense for Stadshypotek to issue floating rate covered bonds, as this minimises interest rate risk and swap costs. Though the investor base for floating format covered bonds is still in its infancy, treatment of the asset class in bank liquidity buffers could soon be improved, and since FRNs are better suited for bank liquidity books, this is a market that could potentially deliver a substantial stream of demand.

Five Portuguese covered bond deals were upgraded on Friday by Moody’s, in a move that had been widely anticipated following the sovereign upgrade. But the upgrades came against an increasingly volatile credit backdrop which saw some peripheral covered bonds soften as their respective sovereign markets came under pressure.

European money market funds are beginning to buy covered bonds in the secondary market, according to analysts. Issuers are eager to tap the new investor base and are designing deals to suit the investors.

The constructive covered bond constellation of conditions continued on Thursday as UniCredit Bank Austria took advantage of superlative funding conditions demonstrated in Swedbank’s deal on Wednesday to issue its third deal of the year. Despite pricing almost flat to the curve, the deal attracted one of the highest levels of oversubscription of any Austrian covered bond in two years.

Swedbank looks set to price the tightest non-German euro seven year benchmark covered bond in over five years, and with a negligible new issue premium. The transaction’s success drew on a confluence of positive factors.

Covered bonds rated AA- or higher will be elevated to a Level 1 asset in Liquidity Coverage Ratio (LCR) according to an internal document being circulated at the European Commission. This backs up a press release from the Danish government last Friday. The improved structural bid is most likely to affect bonds lower rated bonds previously ineligible for the LCR, said analysts.

Depfa Bank plc will not be sold to an unrated entity, but will be transferred to the German government’s wind-down institution for Hypo Real Estate Holding, FMS Wertmanagement (FMSW). The issuer’s covered bonds tightened by around 60bp on Wednesday from Tuesday’s open as uncertainty over its future was removed.

Many Portuguese covered bonds could have their ratings upgraded soon, after Moody’s raised the Portuguese sovereign rating last Friday. Banco Santander Totta’s most recent deal, which is a strong candidate for upgrade, was trading 8bp tighter from last week on Monday, but this was due to ECB rate cut hopes, and not credit upgrade hopes.