Euro

S&P cut Spain by two notches to triple B plus on Thursday night, leaving the sovereign precariously close to junk. And although government bonds have lurched 20bp wider, the Cédulas market has shown a stoic response. But the rating agency’s move came as Banco Popular also announced a jump in non-performing loans in its first quarter results – concentrating minds on the country’s unfolding real estate crisis to which Cédulas are inextricably linked.

Nordea Kredit Realkreditaktieselskab (Nordea Kredit) announced an auction of three year Danish covered bonds on Thursday, a day after the Nordea Group’s Finnish arm launched its second jumbo covered bond of 2012.

Rising unemployment in Spain could hit residential mortgage portfolios, JP Morgan analysts have warned. An increase in non-performing loans would affect Spanish cover pools, while a lack of adequate measures to deal with mortgage losses means subordinated bondholders could be called on to provide additional capital.

The evolution of mortgage funding in the UK market has led to some convergence of RMBS and covered bonds as both markets compete in the three year floating rate space. With investors expected to favour secured instruments and issuers seeking innovative ways to address funding and rating challenges, the UK experience might prove to be a foretaste of things to come in Europe as a whole, The Cover argues.

Skipton, Coventry and West Bromwich building societies have recently priced or are marketing UK RMBS deals. The funding levels are close to each other and are not much more expensive than what could have been achieved in covered bond format.

Primary activity in the European covered bond market focused on France on Tuesday after BPCE said it would tap its 10 year. There was a mixed reception to the news amid fears that OAT underperformance would hit demand, but bankers countered that investors were desperately searching for yield.

Dexia Kommunalbank Deutschland (DKD) on Monday announced it will buy back up to €3bn in public sector backed Pfandbriefe across 10 outstanding trades.

A template for covered bond credit default swaps should be launched in the next few weeks, according to a person with knowledge of the initiative. Some syndicate bankers were sceptical of the need for added protection on covered bonds, given their dual recourse structure and inherent risk profile. Others, however, felt that with a paradigm shift in risk perception since the start of the financial crisis, the time could be right to offer buyers an extra layer of security on an increasingly important product.

Berlin Hannoversche Hypothekenbank (Berlin Hyp) will issue a jumbo mortgage Pfandbrief in the summer, after a tender of four public sector backed trades that will help support an increase in the overcollateralisation of its mortgage cover pool, the issuer told The Cover.

Primary supply slowed on Thursday as poor peripheral data helped increase volatility, though the market has €3bn in successful benchmark supply to digest. Berlin Hannoversche Hypothekenbank Aktiengesellschaft (Berlin Hyp) announced a tender of four public sector backed Pfandbrief trades, following a well received public sector backed deal from UniCredit Bank Austria.

Ravenous investors tossed aside their yield targets to pile into a stellar 10 year trade from Commonwealth Bank of Australia. The issuer increased its deal size to print a €1.5bn jumbo off a €4.5bn order book, making Australia the second most prolific jurisdiction of 2012, according to covered bond analysts.

Commonwealth Bank of Australia came to market with its second euro benchmark of the year on Wednesday. The 10 year trade drew huge demand, allowing leads to print a €1.5bn deal an exceptional 11bp inside of initial price thoughts.