Greece

Fitch became the latest rating agency to downgrade bonds to the border of sub investment grade on Thursday, when it cut the covered bonds of four Greek banks. Its leniency relative to Moody’s, which already rates the covered bonds concerned sub investment grade, means the bonds remain repo eligible.

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.

Investors have plenty of cash to put to work and there is scope for modest issuance next week if stable market conditions prevail but thereafter the funding window is expected to move to late August. In the secondary market, spreads are slightly wider but activity is mostly confined to price checking. Italian auctions went well, breeding a little confidence but overall conditions still remain nervous.

Crédit Mutuel CIC launched its debut Obligations à l'Habitat on Tuesday, taking supply in the new French format since last Friday to Eu3.8bn. The borrower managed to find a secure window for issuance in a market plagued by negative rating actions to print a benchmark deal in line with its own curve, and that of the wider French market.

Covered bond bankers expect the Greek parliament to approve austerity measures in today’s vote, but even if that happens, they do not expect much of a relief rally. If the measures are not approved then it’s likely that the consequences will be catastrophic.

Four major investors talked to The Cover about their near term strategy and thinking. They do not think much will change, even if there is a positive Greek outcome. Though two of them felt sentiment could improve a little if the prospective Bankia IPO is successful, confidence in the banking sector is not in great shape.

All eyes are on the Greek vote this Wednesday and the start of the new quarter on Friday. Until then, the primary market is likely to be quiet. Aside from those issuers that have already mandated, there are rumours that two or three German borrowers are lining up to do dollar denominated benchmarks. The secondary market has seen some flow, and after recent heavy selling, interest has been more two way with some clients tentatively picking up cheap peripheral bonds and others tempted to pick up long dated core paper yielding over 4%.

The spotlight remains firmly on the Greek tragedy with bankers anxiously awaiting fresh developments in the hope that there may be some sort of reprieve. Issuers are well funded and can probably sit it out for now but the omens do not look promising. Bank traders say that selling pressure on the peripheral covered bond markets has continued unabated and, with many banks believed to be sitting on significant inventory, there is an increased risk of near term spread widening.

Germany’s ING-DiBa kept primary supply alive on Wednesday, pricing one of the tightest five year covered bonds of the year. As an inaugural Pfandbrief, Eu500m in size and five years in maturity, the trade was never likely to struggle. Syndicate officials expect no further issuance this week, however, as few borrowers can bring deals which boast similarly attractive qualities.

The covered bonds of Greek banks would likely be downgraded to below investment grade in the event that Greece’s sovereign rating is lowered to C, said Fitch on Wednesday.

Syndicate officials are expecting at least one covered bond trade on Wednesday morning, providing the outcome of a vote of confidence in the Greek parliament is positive. ING-DiBa remains the best hope for issuance this week, though a French name could also make an appearance.

Issuers are waiting for some better news out of Greece before deciding whether to press on with transactions, despite most receiving strong interest during roadshows. After selling in the secondary market on Thursday, sovereign spreads on Friday tightened on rumours of an aid package for Greece. But with market sentiment yo-yoing from one day to the next, any window for issuance before the summer lull is likely to be narrow, and perhaps too risky for first time euro borrowers such as ANZ Bank.