Italy

Italian covered bonds face further cuts despite being given a new rating ceiling of A2 by Moody’s. The rating agency has not yet taken its axe to the issuers, and is expected to cut them all by at least one notch, bringing some OBG’s close to the sub-investment grade border.

Italian issuers are braced for another round of covered bond rating cuts after Moody’s lowered Italy’s government bond rating on Friday. The last of the country’s double-A bonds will fall to single-A as a result, leading to harsher regulatory treatment and a reliance on credit investors, said analysts.

Intesa Sanpaolo created two new mortgage backed jumbo covered bonds as part of an exchange offer open to public sector backed bondholders, who also voted to allow the issuer to amend its public sector documentation and make existing rating triggers less stringent.

The senior market took centre stage again on Tuesday, dissuading covered issuers from competing with another trio of unsecured trades after Westpac’s slow bookbuild on Monday. The Australian issuer closed the spread gap with its Nordic peers, but found demand lacklustre compared with earlier Australian benchmarks.

Italian and Spanish covered bonds widened on Monday morning under sovereign pressure, drowning out any movement on Intesa Sanpaolo’s public sector backed bonds as a result of the issuer’s exchange offer. The borrower will exchange public sector covered bonds into new mortgage backed bonds of the same coupon and maturity, after Moody’s downgraded the public sector bonds.

Cédulas from strong names tightened on news that the EU is to provide the Spanish banking sector with €100bn in financial aid. But though the move is supportive for secondary levels, Spanish banks have limited issuance capacity in the short term. In addition, saddling the sovereign with new debt could lead to ratings pressure, and Cédulas ratings would not survive a sovereign downgrade.

The UK’s Clydesdale Bank has finished a domestic roadshow and could launch an inaugural benchmark mid-week after receiving final investor feedback on Tuesday. Australia’s Suncorp Bank, meanwhile, is expected to announce a formal mandate for its own domestic debut later in the week.

Europe’s peripheral covered bond markets are looking over their shoulders after Fitch downgraded Banco Popular Portugal’s covered bonds on Wednesday. This followed downgrades of Greek and Cypriot covered bonds which have left their issuers unable to access emergency ECB repo funding.

The axe of Moody’s has fallen on Cédulas as the agency continues its European wide review on financial institutions. Unlike their Italian peers, many Spanish covered bonds remain double-A rated, and all retain vital access to ECB funding while the primary market becomes ever more elusive.

Moody’s downgraded six Italian covered bond programmes in the first step of a review of 114 banks across 16 European countries. The sweeping cuts left only Intesa San Paolo and UniCredit with double-A ratings and consigned the rest of the Italian covered bond sector to single-A.

Hopes for imminent covered bond issuance dimmed on Monday as the asked for stability proved elusive. With government spreads still widening and background volatility persistent, even top issuers will have to offer positive new issue premiums to compensate buyers, said syndicate officials.

Spread tightening has stalled after the first quarter rally, according to DZ analysts, who urged investors to reposition themselves in preparation for spread widening. But with many investors still on holiday, the secondary market has become easier to move with smaller tickets, and traders said it was too early to draw conclusions from an increase in selling.