Europe

The technically Aa3-rated euro covered bonds of Kommunalkredit, now under the stewardship of KA Finanz, have widened from mid-swaps flat to 50bp this week as forced selling followed speculation that the rating contract with Moody’s could be void. But, in light of the support that covered bond ratings of wind down entities have historically enjoyed, there is a hope that Austria will see the sense in supporting the covered bond rating. However analysts warn that the bonds still face substantial risks.

BPCE made its debut in the offshore renminbi market on Wednesday, pricing a 10 year non call five tier two bond. The French lender joined a series of non-Chinese banks that have tapped the dim sum bond market to beef up their Basel III tier two capital buffers.

Covered bonds are dual recourse and backed by a dynamic collateral pool that ensures their highest quality at all times. In contrast RMBS are backed by a static pool, and because the instrument is non-recourse, the issuer in extreme circumstances would probably not be allowed to support the deal. For these and other reasons, the regulatory treatment of Van Lanschot’s conditional pass through (CPT) covered bond is justified as it is a safer instrument than Rabobank’s RMBS, says covered bond consultant Richard Kemmish in response to an opinion piece published by The Cover suggesting the oppposite.

ABN Amro has confirmed that the conditions have been met for it to change the terms of six outstanding covered bonds from hard to soft bullet. However, the required quorum to change terms was not met for two deals and eligibility conditions were not satisfied for another two deals.

Bank of America Merrill Lynch and Deutsche Bank are working on allocations tonight on the IPO of Auto Trader, which has been a big success.

Nationwide and Caixabank launched long dated deals on Wednesday. Even though both trades were fairly priced, this part of the curve was heavily supplied. The deals also suffered from a widespread market malaise, partly stemming from renewed concerns over Greece. But Nationwide's was undoubtedly the stronger deal, being more appropriately sized and priced. It was also placed with high quality private investors, in stark contrast to the Spanish deal.

Sentiment in the European covered bond market was softer on Tuesday ahead of the US’s Federal Open Market Committee (FOMC) meeting. And after a strong rally this year, real money accounts have been taking profits ahead of the end of the first quarter of the year. Austrian covered bonds have underperformed the most as negative headlines have compounded the generally bearish mood.

Fitch and Moody’s have interpreted Spain’s new bankruptcy regime differently, though according to DZ Bank covered bond research analysts, both agencies see elevated credit risk in Spanish cover pools relative to international standards.

Rabobank’s Obvion subsidiary sold nearly €2bn of five year RMBS last Thursday, at a considerable spread pick up to where Dutch pass-through covered bonds from entities with much weaker ratings would be expected to price. The deal, originated by one of the best rated banks in the world and backed by very high quality collateral, suggested that covered bond investors could be missing out by not looking at the RMBS market.

A partial sale of Kommunalkredit to a new company, KA New, is likely to lead to lower credit ratings for the bank’s Swiss franc-denominated covered bonds. However its euro-denominated covered bonds will remain in the wind down entity, KA Finanz, and should be better protected, said Commerzbank research on Monday.

A partial sale of Kommunalkredit to a new company, KA New, is likely to lead to lower credit ratings for the bank’s Swiss franc-denominated covered bonds. However its euro-denominated covered bonds will remain in the wind down entity, KA Finanz, and should be better protected, said Commerzbank research on Monday.

Rabobank’s Obvion subsidiary sold nearly €2bn of five year RMBS last Thursday, at a considerable spread pick up to where Dutch pass-through covered bonds from entities with much weaker ratings would be expected to price. The deal, originated by one of the best rated banks in the world and backed by very high quality collateral, suggested that covered bond investors could be missing out by not looking at the RMBS market.