Europe

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

Italian issuers are dangling close to junk after another round of downgrades from Moody’s. Though OBG ratings escaped unscathed, analysts expect more covered cuts even without further action on the sovereign or issuers. Moody’s methodology allows for flexibility when rating the bonds of low rated banks, but Italian issuers lack the high overcollateralisation of their Spanish peers.

Italian covered bonds face further cuts despite being given a new rating ceiling of A2 by Moody’s. The rating agency has not yet taken its axe to the issuers, and is expected to cut them all by at least one notch, bringing some OBG’s close to the sub-investment grade border.

Italian issuers are braced for another round of covered bond rating cuts after Moody’s lowered Italy’s government bond rating on Friday. The last of the country’s double-A bonds will fall to single-A as a result, leading to harsher regulatory treatment and a reliance on credit investors, said analysts.

This week’s first ever Pfandbrief backed by aircraft mortgages has been warmly received. But amid the fanfare for the issuer, NordLB, there are concerns over the security of the assets involved that in turn are stoking debate over what assets should be eligible for covered bond funding.

Sweden’s regulator wants to alter how issuers value cover pool assets and introduce regular collateral stress tests.

New Irish insolvency legislation will benefit covered bonds over the long term, according to Moody’s. But as the new law will provide debt forgiveness for mortgage borrowers with unsustainable loans, it could hit Irish cover pools that boast a high percentage of negative equity loans.

Intesa Sanpaolo created two new mortgage backed jumbo covered bonds as part of an exchange offer open to public sector backed bondholders, who also voted to allow the issuer to amend its public sector documentation and make existing rating triggers less stringent.

NordLB launched the first ever aircraft Pfandbrief (Flugzeugpfandbrief) on Tuesday, pricing a twice oversubscribed five year deal at the tight end of guidance.

Münchener Hypothekenbank’s debut dollar benchmark surprised the market and astonished the issuer, which had only envisaged a small private placement. MuHyp’s next benchmark will be a euro trade after the summer break, but though it is not originating new dollar assets the borrower has not ruled out another public deal in that currency.

Münchener Hypothekenbank (MuHyp) will price its first benchmark dollar covered bond on Friday afternoon, launching the deal after receiving strong reverse enquiry from SSA and central bank buyers.

Bayerische Landesbank (Bayern LB) found strong international demand for its latest 10 year benchmark, which was priced flat to the borrower’s outstanding curve. The €500m trade completed Bayern LB’s 2012 covered bond funding plan, though the issuer’s determination to bring a long dated deal and push for tight pricing limited demand, said syndicate bankers.