Europe

Covered bonds will become an increasingly important bank finance tool in 2012, but their growing stature will not offset a continued downward ratings migration, Moody’s said in its 2012 outlook. The sovereign debt crisis will heap more pressure on issuer ratings and increase refinancing risk, particularly in Italy and Spain but also in core Europe.

The UK’s FSA has unveiled its policy on regulated covered bonds. It has made the case for loan level data provision and said why stratification is not good enough, in its newly-released policy document.

UK issuers approach 2012 sporting a strong domestic investor base and a tightened framework, having retained market access through some of the most volatile periods of 2011.

Austria’s Erste Group has said it will increase its use of covered bonds to meet €3bn of long-term funding needs next year. The issuer does not plan to participate at all in the senior unsecured wholesale market in 2012, a segment that provided three quarters of the group’s funding in 2007.

Covered bonds will continue to play a prominent part in investor portfolios next year, according to a survey by Natixis. More than 80% of investors also expressed interest in structured covered bonds, though buy-siders away from the survey reckon the level of demand may be overstated, as given the choice buyers will prefer traditional covered bonds.

SNS Bank has asked DZ Bank, Natixis, Rabobank and RBS to organise a series of investor meetings that will start on December 12.

Markets stabilised on Tuesday morning following S&P’s announcement that it may cut sovereign ratings across the eurozone, ending three days of sovereign tightening. Overall the tone remains constructive, according to covered bond traders, with better buying in French and peripheral covered bonds. But with only a couple of weeks of trading to go before year end, and covered bond spreads not following sovereigns tighter, issuers are still most likely to wait for an opportunity in January.

Commerzbank will head a number of German banks issuing structured covered bonds next year, market conditions permitting, as momentum gathers in the product’s development.

Fitch has downgraded mortgage backed covered bonds issued by three Portuguese banks, highlighting the risk of peripheral covered bonds falling below the rating threshold for ECB repo eligibility. Issuers still shut out of the market are heavily reliant upon repo funding, and further downgrades could force the ECB to adjust its criteria, though DBRS has offered a lifeline to at least one Portuguese bank.

With a €600bn maturity mountain to scale next year, half of which is in the comatose senior unsecured sector and the remainder split between covered bonds and government guaranteed debt, European banks had been hoping to proportionally increase their covered bond funding. But this avenue has also been constricted and alternatives must now be considered. Covered bonds that might have been publicly placed are now being pledged for bilaterally negotiated repo trades and ECB repos. In addition banks are aggressively deleveraging.

The German Association of Pfandbrief Banks (VDP) is set to launch its secondary market transparency initiative in the new year. It has been piloting the scheme for two months, securing daily price quotes for jumbo Pfandrbriefe from market makers at 12 banks.

Secondary market activity has slowed considerably as banks wind down their balance sheets ahead of the year end. Market making is still happening but flows are skewed to the bid side, with bids so low that few investors are prepared to deal on them.