Germany

German, French and UK issuers launched trades on Tuesday as indices tightened and stock markets rose on hopes that a solution to the eurozone debt crisis had been outlined over the weekend.

Secondary markets broadly remain under pressure, though there are cracks of light appearing here and there. The long end of the French market seems to be stabilising, there have been some buyers of Cédulas and there is still a smattering of interest in selective Scandinavian names. But the outlook remains dim and relative value against other sectors suggests covered bonds are expensive.

The Cover provides a brief summary of the regular covered bond research notes produced by Deutsche Bank, Société Générale CIB, LBBW, Barclays Capital and DZ Bank. With the covered bond to senior unsecured spread having widened considerably in the recent past, one of the key focuses is on relative value, and in some cases senior is preferred over covered. A couple of houses also look at the Scandinavian region with one highlighting the risk of house price declines on high LTV pools in Denmark and Sweden. Finally, one house looks at rising Spanish NPLs and finds that this should not be a problem – provided there’s a €75bn recapitalisation.

A UK based covered bond investor spoke to The Cover about the sovereign crisis. He believes the primary market should still be able to function, though the group of issuers capable of doing a deal will be much smaller. Greece is beyond hope, but he says the rest of Europe can still be saved.

Market participants were not swayed by a moderate rally in sovereign CDS and senior financials on Wednesday morning, preferring to hold out for a more stable backdrop. But with an ECB meeting in Frankfurt on Thursday and the Euromoney covered bond conference and ECBC plenary taking place on 14-15 September, opportunities for issuance might be limited to early next week.

Market conditions improved on Tuesday, though issuance remained elusive as issuers and investors waited to determine whether the relief would hold. Meanwhile Austrian, Norwegian, UK and French issuers are lining up.

Covered bond traders said the secondary market remained inactive on Monday with liquidity still seriously lacking. Most bonds issued since the market reopened have struggled to perform, while the weight of €20bn of supply was pushing spreads on outstanding bonds wider, they said.

ING on Wednesday confounded predictions that a German or Nordic name would end almost two months of inactivity in the covered bond market. The borrower launched a bold €1.75bn 10 year transaction, which offered investors a generous 15bp concession over its outstanding curve, providing the market with an indicator of the higher premiums now needed to print deals.

UBS and Eurohypo tapped the short end of the curve on Thursday, leaving long dated supply to UniCredit. Swedbank issued a five year dollar benchmark. Meanwhile the pipeline continues to build, with HSBC, Nordea Bank Finland, and Deutsche Pfandbriefbank announcing roadshows ahead of planned transactions.

Prospective buyers of peripheral paper are waiting for imminent Spanish and Italian auctions to indicate market sentiment, said syndicate officials. Meanwhile the covered bond market would benefit from more attention to credit fundamentals, as opposed to an exclusive focus on underlying government bonds, said Morgan Stanley analysts.

Covered bond traders and syndicates warned against premature optimism during the relative calm at the start of this week, and it turns out those warnings were apt. But syndicate officials have not given up hope of issuance in the next few weeks even though the possible candidates to reopen the market are down to a select few from Germany, the Nordics and the Netherlands — and those with credit lines to US investors are now even better placed.

The pipeline for issuance continued to build on Thursday, with Austrian, Nordic, and French borrowers scheduling investor meetings ahead of planned transactions. Though all prospective trades are in euros, syndicate officials said it could be a dollar trade that reopens the market.