France

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.

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.

Secondary activity in the covered bond market is picking up, with a slew of deals and merger activity spiking interest. DexMA is performing but Dexia Kommunalbank is rudderless. Banco Pastor has tightened and Caixa Catalunya has seen some interest. Tier one French names are also enjoying better selling. More generally, stronger ECB rate cut expectations mean the short end is well supported.

Caisse de Refinancement de l'Habitat is poised to price a €1.4bn 12-year deal at the tight end of mid-swaps plus 120bp-125bp spread guidance. With a book in the region of €1.6bn, supported by robust Nordic, German and UK demand, the deal is a strong endorsement of the French banking system. Though there is doubt over whether other French issuers will follow its lead, the market is clearly there for the right name at the right price — as today’s DNB Nor Boligkreditt’s mandate announcement illustrated.

Traders reported muted flows in the secondary market on Wednesday ahead of Thursday’s ECB meeting, amid intense speculation that another round of covered bond purchasing could be announced. Italian bonds have reacted remarkably stoically to the republic’s triple notch downgrade — although this might be due to the absence of bids for second tier institutions.

With the covered bond market waiting for constructive news out of Thursday’s ECB meeting, primary activity on Wednesday was limited to a €200m tap of Crédit Agricole’s 2021s. Syndicates said the tap showed investors were not totally sidelined, but the market — like other asset classes — was in desperate need of a message that would restore confidence and allow new issuance to be absorbed in the secondary market without provoking a sell-off in outstanding bonds.

Hopes of primary market supply evaporated on Tuesday morning as global equity markets dropped and European iTraxx indices and peripheral CDS widened further. In the secondary market activity focused on the embattled Dexia Municipal Agency, with its spreads widening 20bp across the curve. Dexia’s triple-A covered bond rating is under threat, though talk of its parent bank being placed into joint venture with French entities Banque Postale and Caisse des Dépôts et Consignations could bode well for its covered bonds.

After being among the main beneficiaries of tightening secondary spreads last week, Dexia’s outstanding paper pushed out again on Monday. The group’s share price dropped sharply after Moody’s placed the ratings of Dexia’s three main operating entities on negative review. The agency is concerned about Dexia’s access to short term funding and the increase in the amount of collateral the institution is having to use to hedge derivatives.

Covered bond market participants are firmly focused on Thursday, when the ECB could announce another round of covered bond buying. Regardless of market conditions, a deal on Monday was always going to be unlikely because of German holidays. But the weak market opening has made a deal between now and the ECB meeting more tricky — particularly for the smaller names that dominate the pipeline. Covered bond traders reported a very quiet morning, with customers unwilling to take a position before Thursday.