Europe

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.

Canadian issuers will no longer be able to use insured mortgages as collateral for covered bonds. Finance minister Jim Flaherty introduced a bill into the Canadian parliament on Thursday that will create a register for covered bond issuers. The bill will also prohibit the use of mortgages insured by private insurers or by the government backed Canadian Mortgage and Housing Corp (CMHC).

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.

Caisse de Refinancement de l’Habitat (CRH) issued its second big Swiss franc covered bond in three months, a Sfr375m dual trancher, bringing its 2012 supply in the currency to Sfr1.025bn.

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.

Increasing encumbrance on bank balance sheets could become an “arms race spiral” of even greater encumbrance, risking financial stability, the Bank of England’s Andrew Haldane said in comments released on Tuesday.

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.

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.