Europe

German banks are further reducing cover pool exposure in peripheral European jurisdictions as concerns escalate over the possibility of sovereign debt restructuring.

A new world order in debt markets could soon be ushered in with the first covered bond new issue to be priced through domestic government bonds, investors and bankers were forecasting this week.

Standard & Poor’s on Friday cut public sector backed covered bonds issued by Banco Bilbao Vizcaya Argentaria from AAA to AA+, on negative outlook, because of its criteria concerning the rating of non-sovereign issuers that exceed the rating the sovereign in the European Monetary Union.

Secondary trading has paused for breath lately, but there are still good pockets of liquidity and interest – specifically for French, UK and to a lesser extent Dutch and Scandinavian deals. The primary market could be due another slow week though a French deal is highly likely, with Société Générale tipped as a probable candidate. UK issuers are looking at the dollar market but there is speculation that one is looking at sterling.

In a covered market dominated in recent weeks by rare and high quality issuance, market participants had awaited Dexia Municipal Agency’s five year Obligations Foncièrs with some trepidation. The deal was a resounding success however; with 100 accounts participating in the twice oversubscribed Eu1bn no grow trade.

Though primary supply slowed on Thursday the success of twin Eu1bn five year deals from WL Bank and Dexia on Wednesday proves the market remains receptive. Germany’s WL Bank convinced more than 100 accounts to participate in a no grown benchmark trade on Wednesday, which was well received by domestic and foreign investors.

Dexia Municipal Agency brought a second Eu1bn no grow five year deal to market on Wednesday, after the publication of positive first quarter results. The trade was well received by investors, allowing leads to price inside of guidance on the back of a Eu2bn order book.

Primary market activity restarted on Wednesday, with WL Bank launching a Eu1bn five year deal. An infrequent top tier issuer, the borrower follows a recent trend in the covered market towards well received supply from rare high quality names.

Market participants anticipate two new issues on Wednesday, though the primary market remained quiet on Tuesday. WL Bank mandated for a euro mortgage backed transaction with a five year maturity, and Dexia Municipal Agency is expected to bring its public sector backed Obligations Foncièrs after publishing its results on Wednesday morning.

Moody’s placed Banca Popolare di Milano’s covered bonds on review for possible downgrade on Monday, because of a corresponding rating action taken on the bank itself.

Amid growing concern over peripheral euro sovereigns, covered bond analysts are focusing on the exposure to the troubled periphery of public sector cover pools in core jurisdictions.

The drive for a minimum covered bond transparency standard looks set to continue for a while yet. After the European Covered Bond Council met the ECB in Frankfurt on April 26, the technical issues working group is due to meet on May 27. They will present a refined list to the ECBC’s steering committee which is looking for a middle way that appeases investors, the ECB and issuers. For the UK market, collateral transparency is unlikely to be a problem, but misguided views on what happens after a UK issuer’s insolvency illustrates opacity is still an issue