Ireland

The eurozone sovereign debt crisis has tested the covered bond product like never before. Katie Llanos-Small examines how covered bonds from the periphery have performed during the crisis, and asks what might happen if a eurozone sovereign were to default.

Amid growing concern over peripheral euro sovereigns, covered bond analysts are focusing on the exposure to the troubled periphery of public sector cover pools in core jurisdictions.

Distressed Portuguese and Irish issuers could have the option to postpone the repayment of maturing covered bonds, according to UniCredit analysis, due to ambiguous wording about failure to pay the final redemption amount.

The primary market has slowed to a standstill today, though transactions are in the pipeline and could be due this week — including some new names. In the secondary market, the peripheral sovereign sector has softened but the bid for peripheral covered bonds continues to look well placed.

Fitch yesterday (Tuesday) downgraded Bank of Ireland’s UK residential mortgage covered bond programme and cut Irish covered bonds issued by AIB Mortgage Bank and EBS Mortgage Finance.

Fitch today (Friday) cut Allied Irish Banks and Bank of Ireland from A- to BBB, on stable outlook, following a downgrade of the Irish sovereign yesterday.

Anglo Irish Bank Corp Limited yesterday (Tuesday) launched a buyback offer aimed at all remaining outstanding external covered bonds launched under a UK programme, an operation that an official at the issuer described as a “clean-up exercise”.

Standard & Poor’s on Friday cut mortgage backed covered bonds issued by Ireland’s AIB Mortgage Bank and Bank of Ireland Mortgage Bank from AA+ to AA and from AAA to AA+, respectively, after downgrading their parents’ issuer ratings on the same day.

Moody’s today (Thursday) indicated that the long term debt ratings of Bank of Ireland, EBS Building Society and Irish Life & Permanent could end up lower than the rating agency envisaged when it placed them on review for possible downgrade on October 6.

While not immune from nervousness triggered by uncertainty about the prospects and structure of a bailout package for Ireland the covered bond market this week held up relatively well, according to syndicate bankers, who attributed thinner liquidity to the approaching end of the year. A large US dollar private placement yesterday (Thursday) wrapped up sizeable new issuance in covered bonds this week.

Fitch put public sector covered bonds issued by Depfa ACS Bank on negative review today (Wednesday) because of the potential impact of the issuer’s business restructuring.

Standard & Poor’s affirmed Bank of Ireland Mortgage Bank’s covered bond programme at AAA yesterday (Wednesday), but revised its outlook from stable to negative because of a change to the outlook of Bank of Ireland from stable to negative on 14 September.