Italy

The covered bond ratings of Banca Popolare di Milano and Banca Carige are likely to be downgraded to junk. This will lead to a prohibitive rise in the bonds’ capital consumption, lowering the absolute return and increasing the risk of forced selling. This will be immensely frustrating for investors, given the high quality collateral and regulatory support. The move may highlight the merits of pass-through structures.

Multi-Cédulas are enjoying some investor support, and RBS says they offer good relative value. However many of these Spanish multi issuer programmes face being downgraded to junk and are lagging the country’s government bond rally. Downgrades would spark forced selling, which the existing investor universe would not be big enough to absorb, Crédit Agricole has warned.

The four euro benchmarks that were priced this week are mostly trading slightly tighter in the secondary market, despite being priced with very small new issue premiums. Along with a period of benign macroeconomic news, the negative net supply of euro benchmarks in 2013 has created a particularly supportive backdrop for new issues, according to covered bond bankers.

The resumption of post-summer covered bond supply continued on Thursday, including the first issue out of peripheral Europe. UniCredit’s €1bn seven year was priced at the tight end of guidance, while Belgian bank KBC also tapped the market for a €750m three year that was well received, confirming the window for issuance remains wide open.

Moody’s has downgraded Banco Popolare Società Cooperativa’s long-term debt rating by three notches, from Baa3 to Ba3, over concerns about the bank’s asset quality. Analysts expect a three notch cut of its covered bond rating to follow.

Gabriele Minotti, head of funding at Credito Emiliano, spoke to The Cover about the bank’s recent covered bond deal, the roadshow and the focus of investors’ questions .

Credito Emiliano attracted a great reception for its first covered bond in two years. The deal’s success, in marked difference to last week’s less than stellar slew of primary deals, reflected the attractive premium, the issuer’s marketing efforts and, most importantly, stable market conditions.

UniCredit priced the tightest covered bond since the start of the crisis on Wednesday, achieving the lowest coupon for an Italian covered bond. Waleed El Amir, the bank’s head of long term funding, group finance, spoke to The Cover about the deal.

The new issue covered bond market gathered momentum on Tuesday with two fresh deals, including one from UniCredit which should substantially cut its cost of funding.

Holidays in Germany and the UK next week shrink the issuance window but covered bond bankers still expect benchmark deals. A seven year tenor makes for simple execution, but Deutsche Pfandbriefbank’s (Pbb) 15 year bond has captured issuers’ imaginations, said syndicate officials.

The covered bond market is open for almost any issuer and though its unlikely that activity will pick up quickly, there are a number of potential transactions expected in the coming weeks, bankers told The Cover on Monday.

The subject of SME-backed covered bonds continues to provoke a sharp division of opinion within the industry. And it was a lively topic at the annual covered bond investor conference, held on Thursday in Frankfurt.