France

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.

Covered bond participants are anxiously looking to developments in the wider market in the hope that a resolution to the sovereign impasse is found. But, in the event nothing is agreed, contingency plans are now being made. Some syndicate bankers are hoping that the EU summit meeting in Brussels on December 9 will yield progress. Tap issuance is possible, but with the market as it is some bank holders believe there is more sense in remaining short some bonds.

Despite hopes that the result of Spain’s general election would bolster sagging equities and pull in widening government bond yields, market conditions appear prohibitive at the start of a potentially shortened week.

European covered bond markets continue to look in poor shape as the macro sovereign backdrop dramatically deteriorates. This suggests that Commonwealth Bank of Australia’s euro denominated benchmark is likely to remain on hold for the time being. But that should not delay Westpac, which is planning to open books on Thursday afternoon.

Crédit Mutuel Arkéa overcame difficult markets to bring in €1bn of funding on Wednesday through a dual tranche tap of 3.5 and 10 year bonds. The deal attracted the first bit of purchase programme (CBPP.2) buying and its success may encourage other issuers to use lower risk taps if tricky market conditions persist over the next few weeks.

The euro covered bond market has begun to show signs of life, a full five trading days after the formal start of the ECB purchase programme. Crédit Mutuel Arkéa will price a rare dual tranche tap later on Wednesday.

News of the ECB’s latest covered bond purchase programme has failed to move secondary spreads, analysts and syndicate officials told The Cover on Monday. Meanwhile the situation in peripheral jurisdictions continues to deteriorate, making the programme’s success all the more contingent upon concrete political resolution in the individual countries, and Europe as a whole.