Ireland

Lulled into a false sense of security by the European Central Bank’s quantitative easing programme, investors seem to think they are immune from events in Greece. It’s certainly true that markets are in much better shape than they were when the country was first bailed out in 2010. Investors in AIB Mortgage Bank’s latest deal would probably vouch for that.

After pulling a 10 year deal last year, AIB Mortgage Bank returned to the market on Tuesday to price a very successful seven year. At the same time its Spanish peer, Bankinter, chose to issue in the same 10 year maturity that foiled AIB last year. Both banks achieved a solid result suggesting better quality peripheral covered bond issuers have not been affected by events in Greece.

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.

Standard & Poor's upgraded the Ireland-based but German-owned Depfa Bank PLC to 'A-' from 'BBB' with a stable outlook on Monday. The state-owned bank can soon be considered a Government Related Entity (GRE) and will benefit from increased state support following a transfer of its ownership.

Covered bonds issuers in core and peripheral Europe will be aiming to finalise their 2014 funding needs in the next two weeks and others may be considering bringing forward their 2015 funding. As Irish and Belgian banks have been less active so far this year, there is a fair chance of supply from these regions. Covered bond research analysts have also recently reported on these markets.

Standard and Poor’s positive rating action on Depfa plc on Monday, and an expected rating upgrade from Moody’s that has yet to materialise, have had barely any impact on the issuer’s Irish covered bond spreads. The outlook should become clearer when further details of its ownership structure have emerged, bankers told The Cover on Tuesday.

Depfa Bank plc will not be sold to an unrated entity, but will be transferred to the German government’s wind-down institution for Hypo Real Estate Holding, FMS Wertmanagement (FMSW). The issuer’s covered bonds tightened by around 60bp on Wednesday from Tuesday’s open as uncertainty over its future was removed.

Depfa ACS covered bonds were unchanged on Thursday as the names of the failed bank’s preferred bidders emerged. The buyer’s strong rating suggests the covered bond rating is safe, and even if a sale is not agreed, the German government’s continued ownership means the rating is protected. As such, the covered bonds which have the highest rating in Ireland, should be trading tighter than all other Irish deals.

The more modest year-to-date tightening of Irish covered bonds relative to other peripheral jurisdictions has created a value opportunity, says Barclays research, which recommended buying Irish covered bonds versus Irish government bonds. However, traders say limited liquidity in the secondary market for peripheral names means that the trade idea will be difficult to executive in practice.

This week’s suite of covered bond deals have performed well and underscore that the market is receptive. AIB Mortgage Bank’s transaction was clearly the star of the show with its bond trading 10bp inside reoffer and its whole curve 3bp to 4bp tighter on Thursday paying little heed to bearish overnight comments from the Federal Reserve’s chair, Janet Yellen.

AIB Mortgage Bank enjoyed a stellar response for its first covered bond this year. The deal attracted the most demand for any Irish covered bond since the Irish government’s bail-out of its banks.

AIB Mortgage Bank has mandated leads for a seven year covered bond to be launched on Wednesday, subject to market conditions. Meanwhile, Aktia Bank has picked leads for a covered bond roadshow starting next week.