Germany

The possibility of a covered bond issuer pricing a deal inside government debt, once considered highly improbable, is now conceivable, say Deutsche Bank and Barclays Capital.

Bayerische Landesbank on Thursday priced a Eu1.25bn Pfandbrief that paid testimony to the bank’s name and the strength of its collateral pool. The result was positive for the Landesbank sector as a whole given recent rating agency concerns over systemic state support for the sector.

Eurohypo capitalised on a market starved of supply for the last week, completing a Eu1.5bn three year deal on Thursday. Despite coming to market with the same maturity on the same day as German peer Bayerische Landesbank, the order book was two and a half times oversubscribed with orders from more than 115 single accounts - a testament to the strength of demand after a brief lull in issuance.

After more than a week without benchmark euro issuance, three such deals were launched from core Europe on Thursday, as Eurohypo and Bayern LB came to market at the short end of the curve, while CIF Euromortage opted for a long dated transaction.

Eurohypo will price a benchmark mortgage backed Pfandbrief later on Thursday, having attracted three times as many investors as its last trade, for a transaction three times the size.

Bayerische Landesbank began taking indications of interest for a benchmark public sector Pfandbrief, expected to be priced on Thursday, which could end the mysterious drought in the covered market.

Struggling German bank, WestLB is lining up the sale of its pfandbrief issuing subsidiary, West Immo, to US investment firm Apollo Investment Management. Covered bond analysts suspect the sale will have a negative impact on the ratings of West Immo’s Pfandbrief but the sale is more likely to be a positive for WestLB itself. In any case, West Immo’s covered bonds, which have tightened over the last month, remain well supported.

Ratings uplifts for senior long-term debt issued by German Landesbanks could be a thing of the past. Moody’s research suggests the support structures for Landesbanks in distressed situations are not the same in a Basel III, post-crisis world. As a result, the covered bonds issued by some Landesbanks could come under rating pressure.

German banks are further reducing cover pool exposure in peripheral European jurisdictions as concerns escalate over the possibility of sovereign debt restructuring.

Secondary trading has paused for breath lately, but there are still good pockets of liquidity and interest – specifically for French, UK and to a lesser extent Dutch and Scandinavian deals. The primary market could be due another slow week though a French deal is highly likely, with Société Générale tipped as a probable candidate. UK issuers are looking at the dollar market but there is speculation that one is looking at sterling.

Though primary supply slowed on Thursday the success of twin Eu1bn five year deals from WL Bank and Dexia on Wednesday proves the market remains receptive. Germany’s WL Bank convinced more than 100 accounts to participate in a no grown benchmark trade on Wednesday, which was well received by domestic and foreign investors.

Primary market activity restarted on Wednesday, with WL Bank launching a Eu1bn five year deal. An infrequent top tier issuer, the borrower follows a recent trend in the covered market towards well received supply from rare high quality names.