Europe

Twin Spanish mandates in four year maturities from Banco Bilbao Vizcaya Argentaria and Banco Espanol de Credito, opened the market on Monday, after a week with scant primary activity, though strong secondary trading in cédulas.

The torrent of Spanish issuance so far in 2011 has confounded many analysts’ estimations. They predicted it would begin in earnest after Q1, as Spanish covered bond redemptions will reach a record high of Eu22.4bn this year, with the majority occurring in the second and fourth quarters.

US dollar denominated covered bond issuance is set for growth, as demand is far outpacing supply, regardless of whether a US law is put a law in place, and European issuers are lining up deals for launch. Funding executives from many institutions explained their strategies at the 3rd Euromoney US Covered Bond Investor Forum on Wednesday this week.

The absence of primary flow has resulted in a better bid for higher yielding secondary paper. A few large orders have driven BBVA three year paper in by as much at 75bp from launch levels and, with the spread to second and third tier Spanish banks widening, demand has moved down the credit curve. Despite event risk over Japan, there is talk that a French and Spanish bank, not seen this year, could be poised to issue.

JP Morgan and Royal Bank of Scotland have closed books on Skipton Building Society’s Darrowby No1 Funding, a UK prime RMBS. The long four year piece was priced broadly in line with UK covered bonds launched earlier this year, albeit its duration was shorter.

Despite widespread market volatility and risk aversion, the covered market has remained active, though distinctly muted. Berlin Hannoversche Hypothekenbank sold a mortgage backed jumbo Pfandbrief transaction on Tuesday, and on Wednesday taps from French issuers CM-CIC and CRH were launched.

Uncertainty as to the full effect of Japan’s earthquake has prompted widespread risk aversion among investors, and allowed Berlin Hannoversche Hypothekenbank to have the market to itself on Tuesday.

Though primary market activity remains muted, the pipeline continues to grow despite headline risk. A string of mandates for US dollar deals are expected, along with a sterling transaction from Barclays.

RBS priced its second euro denominated covered bond deal of the year on Tuesday, a transaction notable for its particularly granular book and attractive pricing relative to where it would have funded itself in the senior unsecured market.

Obtaining funding for a single-A rated entity from a peripheral jurisdiction was never going to be a stroll in the park — in senior unsecured it has, at times this year, been impossible. Italy’s Banco Popolare raised Eu1.25bn from a 4.75 March 2016 issue via Banca Aletti, BNP Paribas, Goldman Sachs, RBS and UBS on Tuesday, showing how strategically important the covered bond market is, not just for the issuer, but for the health of the entire banking system.

Skipton Building Society’s Darrowby No 1 is set to be the next UK prime RMBS deal to hit the market. Rabobank is marketing its latest Strong RMBS and Veneto Banca is pricing tomorrow.