Europe

Stress in bank funding markets, exposure to troubled eurozone sovereign bond markets and moves away from implicit government support have affected the creditworthiness of many global banks. But Standard & Poor’s approach to covered bond ratings means they should remain resilient compared to other agencies.

The covered bond market remains on hold while it waits for news from the EU summit, the ECB meeting and details of the covered bond purchase programme. Despite continuing systemic doubts, bankers believe the market is open for the right name at the right spread. But even if a solution is unveiled, underlying issues driving the sovereign crisis are expected to resurface — unless the ECB’s mandate is changed.

Speculation that Lloyds would join HSBC and Barclays to issue a covered bond benchmark in US dollars has faded. The allure of RMBS is taking precedence as funding considerations add to other structural advantages. Lloyds, which had been rumoured with a dollar covered bond deal earlier this year, has therefore decided to go for an RMBS.

The concept of liquidity has changed over the course of the financial crisis. Where once it may have been viewed as a free ticket, it is now highly valued — for without liquidity there cannot be a market. Covered bonds are comfortably at the most liquid end of the credit spectrum, but the way they are traded has completely changed since the onset of the financial crisis.

Any benchmark covered bond deals are unlikely to happen before Wednesday when EU leaders unveil their eurozone rescue plan. The lack of any detail emerging from the EU summit has also kept investors sidelined in the secondary market, with traders reporting very limited flows for core and peripheral paper.

The official announcement on Thursday of a joint venture between Caisse des Depots and La Banque Postale, which have both taken stakes in Dexia Municipal Agency, is credit positive for the issuing entity’s Obligations Foncières and should help maintain their triple-A ratings, bankers said.

European borrowers backed off from issuance on Wednesday after French government bond spreads reached 16-year wides versus Germany. UniCredit Bank Austria had hoped to bring a deal after investor meetings in Helsinki and Copenhagen on Tuesday, but leads unanimously agreed that market conditions were not suitable and they will wait to see the result of weekend headlines following the EU summit.

Despite a widening yield spread between France and Germany, French covered bonds continue to perform well, bolstered by support from domestic investors. French issuers, prescient of their 2012 funding needs and the risk to their country’s top rating, could be tempted to return to the markets with a benchmark before the end of the month.

Swedish investors continue to jettison their covered bond holdings, according to SEB.

Standards & Poor’s has assigned covered bonds issued from BRFKredit’s Capital Centre B and Capital Centre E preliminary triple-A ratings, on stable outlook. These ratings replace those of Moody’s, which the issuer dropped, due to disagreements over rating methodology.

Coventry Building Society got the covered bond market off to strong start on Monday morning launching its first euro trade amid a general upturn in sentiment. Core Europe is also showing signs of life, with UniCredit Bank Austria mandating for a public sector backed transaction.

The underlying tone to the primary and secondary covered bond markets remains broadly supportive. Though the wider credit market is clearly still dealing with considerable uncertainty, for the right name and spread, investor demand is there — as evidenced last week with deals from Hypo Noe and CRH. The time could therefore be ripe for more French, Austrian or German names to step in. But whether the market is ready for the rumoured BBVA deal remains to be seen.