Europe

The European Banking Authority (EBA) on Monday published the final draft of its Regulatory Technical Standards (RTS) on close correspondence between the fair value of an institution's covered bonds and the fair value of its assets. The document will put an end to an accounting trick that allowed banks to make their capital position appear better than it was.

NIBC has priced the first conditional pass through covered bond in line with guidance building a comfortably oversubscribed book. But whether other issuers will attempt similar deals remains to be seen.

Sweden’s central bank highlighted the refinancing risk between the duration of assets and covered bond liabilities in a financial stability report this week. It is also concerned about the high proportion of bonds that banks are holding for liquidity purposes. Analysts welcomed the report and the bank’s pre-emptive and prudent approach.

German issuers have struggled to price deals much through swaps this year, but if there was one issuer that could, it was always likely to be Münchener Hypothekenbank. After pricing a €500m five year at 14bp through mid-swaps this time last year, it returned to the covered bond market on Thursday with a more generously priced and larger deal which, despite being this year’s tightest, still managed to offer some performance potential.

HSH Nordbank and Raiffeisenlandesbank Niederösterreich-Wien joined the rush of issuers bringing deals on Wednesday, selling five year and seven year no grow €500m benchmarks, respectively. While RLB NW continued the price tightening trend for Austrian landesbanks, HSH Nordbank offered a generous spread to make sure any rating or reputational concerns among investors were cast aside.

France’s Caisse Francaise De Financement Local returned to the market for the second time this year to issue a 15 year euro deal — the fourth of 2013, but the first from France. It offered a modest premium to the French curve and, being sufficiently different from a host of other covered bonds out at the same time, it was well received.

There were fears that investors had hit their country limits for Ireland earlier this month, when AIB Mortgage Bank’s five year covered bond drew a lukewarm response. But Bank of Ireland disproved this on Wednesday by pulling in a big oversubscription for the longest maturing Irish covered bond issue since the sovereign crisis.

Five issuers from France, Germany, Ireland, Austria and Italy have joined the covered bond pipeline. And, with the European Central Bank ready to consider further extraordinary liquidity measures, the conducive technical backdrop looks set to remain. Despite this, the longer term supply outlook remains uncertain and overall issuance, which is at the decade’s low, is not about to improve.

Banca Popolare Dell'Emilia Romagna Società Cooperativa, has mandated leads for a covered bond roadshow in the wake of the Federal Reserve’s surprise decision not to taper its bond purchasing programme. The Fed’s unexpected move should support spreads and issuance, especially for borrowers like the Italian bank that offer high yields, said bankers.

The covered bond ratings of Banca Popolare di Milano and Banca Carige are likely to be downgraded to junk. This will lead to a prohibitive rise in the bonds’ capital consumption, lowering the absolute return and increasing the risk of forced selling. This will be immensely frustrating for investors, given the high quality collateral and regulatory support. The move may highlight the merits of pass-through structures.

ANZ New Zealand and Kommunalkredit Austria are poised to price €500m five year covered bonds. Both deals have gone without a hitch, with oversubscriptions from a broad range of investors. However, given the lacklustre performance of other recent deals, leads were cautious on pricing and offered attractive spreads.

Conditional pass-through bonds gained buyside support on Wednesday when a leading covered bond investor said they could help small, rating-constrained banks from Europe’s periphery. Henrik Stille of Nordea Investment Management was speaking at a panel at the ECBC plenary session in Barcelona. Vulnerable issuers could use the conditional pass-through structure to shore up covered bond programme ratings as the rating agencies are not going to move quickly on positive developments for covered bonds in the Bank Recovery and Resolution Directive.