Euro

The primary market remained dormant today but there are high hopes that a Northern European deal will surface next week. And, despite the Stadshypotek experience, syndicate bankers believe that with careful execution borrowers could even fund without paying a new issue premium

Net euro denominated covered bond supply has dropped to the lowest level since the euro begun. And with a surfeit of central bank liquidity alongside continued balance sheet shrinkage, this trend looks set to continue, suggesting that the already measly supply forecasts for the year could be revised lower.

Standard & Poor’s brought a ray of sunshine to the world of Cédulas ratings this week, when it upgraded NCG Banco’s bonds because of improvement in the quality and maturity profile of the bank’s loan book.

Deutsche Pfandbriefbank (Pbb) launched a €100m three year floating rate Pfandbrief on Tuesday, but syndicate bankers are sceptical that the euro market will manage much more before Easter. The storm around Cyprus may have subsided, but it has reminded issuers how quickly markets can turn and highlighted the value of covered bond collateral.

Multi-Cédulas came under pressure in the secondary market on Monday after Standard & Poor’s took rating action on 51 classes totalling almost €100bn late last week.

Interest only mortgage loans could destabilise an already stressed Danish housing market, Standard & Poor’s said on Monday.

Crédit Agricole Home Loan SFH was the only borrower to visit the euro covered bond market this week. The issuer sold a €250m tap of a 12 year bond, although syndicate bankers disagreed over the premium the increase offered relative to OATs and the original deal.

Italian covered bond spreads held firm following a round of Fitch downgrades, which came after the rating agency tightened the link between issuer and covered bond ratings in the country.

High redemptions, combined with deleveraging and a drive towards deposit funding has put net first quarter covered bond supply in 2013 on track to hit record lows, said Barclays analysts on Thursday.

Overcollateralisation should not be the main factor when rating agencies assess covered bonds, according to Commerzbank.

Core and peripheral borrowers are waiting for a better market before bringing benchmark covered bonds. Safe-haven names are traditionally first to take advantage of returning stability. But southern European borrowers, which offer higher yields, juicers spreads and are less flexible over pricing, will find execution easier, said bankers.

Trading in Spanish and Italian covered bonds was relatively stable against asset swaps on Monday, while they tightened versus their domestic sovereign bonds, following the news that Cyprus faces a bail-out from the European Union.