Germany

North Rhine-Westphalia is set to become the first German state and one of a handful of European sub-sovereign borrowers to enter the green bond market, after mandating banks on Wednesday to roadshow for its inaugural deal in the format.

HSH Nordbank was set to price its first Pfandbrief backed by ships (Schiffspfandbrief) in five years on Tuesday. The Baa2-rated deal was never likely to appeal to the broad investor base that buys mortgage-backed deals, but with an attractive spread it still managed to get an oversubscribed book.

HSH Nordbank returned to the covered bond market on Monday opening books for its first benchmark Schiffspfandbrief in five years. The short maturity, eye-catching spread and heavily overcollateralised pool of low LTV shipping loans suggests the transaction offers compelling value compared to mortgage Pfandbriefe.

NordLB Covered Finance Bank (NORD/LB CFB) has mandated leads for a European roadshow to sell its first benchmark sized covered bond under the recently amended Luxembourg legal framework. Though this deal will be backed by public sector assets, the law allows for a much wider pool of movable assets, suggesting there is potential for more innovative deals to follow.

Covered bond issuers from outside the Eurozone launched deals this week denominated in sterling and Australian dollars. But a bigger proportion were from the Eurozone where borrowers launched deals in the single currency in maturities that ranged from four to 20 years. The transaction were priced generously and enjoyed a solid reception, with central banks taking a back seat.

The European covered bond market kept up its momentum on Tuesday as four euro-denominated deals hit the screens and books were opened on another denominated in Australian dollars. The euro deals all offered a new issue concession of around 5bp and were comfortably oversubscribed.

The European covered bond market got off to an exceptionally strong start on Monday as LBBW, Compagnie de Financement Foncier (CFF) and BBVA launched euro benchmarks across a range of maturities, without a hiccough. The strong start bodes well for Tuesday when several more euro benchmarks including Bank of Ireland and BPER are due.

The European Central Bank is legally obliged to carry out its role as a single supervisor and its responsibility to apply resolution measures will take precedence over its position as a covered bond investor, say analysts at Barclays research. As the central bank has the power to make decisions that could be detrimental to covered bond holders, covered bond supervision should be strengthened.

Issuance of benchmark Pfandbriefe is expected to increase slightly next year, but with private placements set to decline more sharply, the overall size of the German covered bond market will shrink, said the German Association of Pfandbriefbanks (VDP).

Covered bond investors continue to be concerned about the European Central Bank’s third covered bond purchase programme, as the intervention appears to be pushing private money out of the market. Central bank allocations in recent deals have been up to 60%, and at least one cornerstone investor is gradually exiting the market.

Covered bond harmonisation must be ambitious rather than lowest common denominator, or there is little point in the project, according to a presentation at the Association for Financial Markets in Europe / Verband deutscher Pfandbriefbanken covered bond conference in Berlin.

WL Bank launched a covered bond into a weak secondary market on Thursday, pricing a five year close to where its 10 year had been trading. Screen prices give the illusion that spreads are holding steady, but in reality banks are scrambling to cut inventory and sales are being made below screen bids. But with primary activity likely to dry up, redemptions set to rise and ECB buying unlikely to slow down, the balance of flows will turn and spreads will tighten, said bankers.