France

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.

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.

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.

The primary market has got off to a very strong start, with books building on as many as four deals across four jurisdictions. The transactions, which include two tier two borrowers from peripheral markets, have attracted a total of 440 orders worth a combined Eu8bn. The strong showing bodes well for new peripheral tier two borrowers who are said to be lining up with deals this week.

In what is likely to be viewed as a further positive legal development for the French covered bond market, the decree for Obligations de Financement à l’Habitat was published in the Journal Officiel earlier this week. The new law will have the benefit of being Ucits compliant, say bankers and should emerge at the beginning of April.

The covered bond market remains primed for issuance despite the quietest week so far this year in terms of primary market activity. Spanish borrowers may join Abbey National and Westpac New Zealand in the market next week, though Abbey’s inaugural sterling issue and Westpac’s first covered bond transaction are set to take centre stage.

Bank Austria priced its first Eu1bn deal on Wednesday. Westpac New Zealand is expected to launch its first euro benchmark covered bond in the near future and Abbey National is due to finish roadshowing on Friday for its inaugural sterling issue.

Secondary market activity has picked up across the board with bankers reporting decent interest in France the UK long end, Germany and, most importantly, Spain.

The mood is buoyant and several deals look likely to be announced before long. LTSB and Nationwide have been added to the existing rumours of La Caixa and Sabadell, but with sentiment improving issuers are thinking the market is on a roll so maybe they are better placed to wait a few days more, in which case funding costs could be shaved by even more.

Société Générale yesterday (Wednesday) priced its Eu1bn 4.25% 2023, a deal conspicuous for its level of oversubscription, the highest of any covered bond deal so far this year. Buoyant sentiment and rarity clearly played a role –along with the pervasive new issue premium which, not surprisingly given the scale of demand, was deemed by some to be too large.

Despite decent selling of 10-year paper in the secondary market, the overall tone remains very positive. In the primary market this was most conspicuous in the books for SG’s Eu1bn 12-year, which has attracted the largest oversubscription so far this year. Banco Popular's deal has also gone smoothly.