Germany

Deutsche Pfandbriefbank (pbb) intends to return to the covered bond market in H2 with its first benchmark deal since January 2010. The European Commission on Wednesday approved state aid provided to Hypo Real Estate Group (HRE), of which pbb is a subsidiary, from the Federal Republic of Germany. In a presentation, HRE clarified pbb’s EC approved business model, which will focus on Pfandbrief eligible business in Germany and other European countries.

A UK based credit investor, who has participated in many of this year’s benchmark covered bond deals, talks to The Cover about the current dilemma facing Europe. He believes that throwing more money at the problem, such as through further EFSF buying, will only provide a temporary solution. Ultimately, there needs to be clear evidence that Europe’s high indebted countries are lowering their deficits. There is every chance that this will take place over the next nine months or so. Both Italy and Spain have made progress and should continue to do so, but the Spanish government is probably in the stronger position. His hopes for Greece remain dim.

Covered bond practitioners say the release of Capital Requirements Directives IV is positive for the sector and broadly similar in outlook to the draft version of Basel III that sealed a structural bank bid for the sector. There have been changes in the way covered bonds are treated by the Liquidity Coverage Ratio, and potentially in the way the Net Stable Funding Ratio is applied. Underlying market sentiment remains negative, as many believe that the sovereign debt crisis is only just beginning.

Though a revision of the Capital Requirements Directives (CRDIV) released today will likely be positive for covered bonds, traders and syndicate bankers are not convinced of any lasting effect on market sentiment. On the contrary, the sovereign debt crisis, they said, can only get worse.

Korea Housing Finance Corporation has opened books on its second ever covered bond, a $500m five and a half year transaction. US book building has yet to commence, but with the book already twice covered on the back of strong demand from Asia and Europe, a good reception seems likely. The deal is expected to price later today.

The euro primary market remained closed on Monday. The secondary market, however, has been more active, with liquidity present for both core and peripheral paper. Even Portuguese bonds have enjoyed interest, as fast money accounts salivate over double digit yields.

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.

Insurance companies will increase their holdings of covered and government bonds, while reducing their allocation to equity and long term corporate bonds, according to a report from the Bank of International Settlements.

Dealers and investors remain shell shocked by recent events. Despite relatively upbeat comments from the buy side and a continuation of the spread correction, reported secondary activity has been muted. Syndicate bankers are looking towards stabilisation of the Bund/swap spread and do not rule out the prospect of issuance, though it may be limited to taps.

Secondary market dealers reported little trading activity on Tuesday and described the market as being dysfunctional. Despite that, some participants are trying to take advantage of this price opacity. After opening very weak, the market has bounced back on rumoured central bank intervention.

Hopes for further covered bond issuance have been dashed by peripheral volatility centring around Italy and poor US employment figures, which have weakened market sentiment across asset classes. Prospective issuers are electing to wait, and with holidays in core Europe fast approaching, benchmark supply appears unlikely.

Covered bond research analyst Ralf Burmeister, who is currently on paternity leave with Landesbank Baden-Württemberg, is due to switch to the buy-side and will start his new role in September. His decision to leave LBBW’s covered bond research team follows the departures of former colleagues, Jan King and Florian Eichert.