France

Caisse de Refinancement de l’Habitat was the first covered bond issuer out of the traps on Tuesday, printing a €2bn 10-1/2 year deal that was driven from the outset by yield-hungry German investors.

The covered bond primary market has opened strongly with a trio of top tier names from core jurisdictions collectively raising around €4.5bn on comfortably oversubscribed books. A further seven deals have been mandated for issuance in the near future. This impressive showing is to be expected given liquidity is technically strong. Yet big challenges lie ahead, specifically for peripheral markets — where borrowers remain shut out.

Singled out for special treatment by European regulatory initiatives, covered bonds were the funding tool of choice for the region’s banks in 2011. But an escalating Eurozone crisis meant the record-breaking market entered 2012 relying on state support.

France will remain the largest source of covered bond supply in 2012, bank research analysts unanimously expect, with Obligations à l’Habitat set to continue its ascent as the dominant format for issuance. Spreads remain at historic wides, but bankers expect the French institutional bid to remain robust and issuers to capitalise — even at current levels.

In further signs that the covered bond triple-A world is shrinking, Moody’s has downgraded HSH Nordbank and Deutsche Kreditbank’s (DKB) public-sector and mortgage Pfandbriefe. Dexia Municipal Agency’s covered bonds have also lost their triple-A rating, following Moody’s downgrade of Dexia Credit Local’s issuer rating.

Crédit Agricole Home Loan SFH has tapped its 3.25% March 2017 for €275m, at the tight end of guidance at mid swaps 140bp. Financing on the deal, which has now grown to €1.525bn, was done at very competitive levels. Thanks to the solid reverse enquiry and small size the borrower halved the new issue premium, bucking the trend set by other recent taps.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

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.

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.

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.

Caisse de Refinancement de l'Habitat on Wednesday morning presented the ECB with only its second opportunity to make a primary purchase under the central bank's second covered bond purchase programme. Following in the footsteps of Crédit Mutuel Arkéa — the only other issuer to have done a deal qualifying for support in the primary market — CRH launched an extension of an outstanding 10 year trade at the widest level for French paper this year.

ECB purchasing reached €930m on a settlement basis by the end of last week, with traders reporting buying of German, French, and some Spanish paper in the secondary market. The impact of the programme remains limited, however, and there have been calls for the eurosystem central banks to make bonds purchased under the programme available for bilateral repo purposes.