Italy

Westpac’s inaugural euro denominated trade was a blow-out success, with orders swelled by demand from Germany and from banks. But an unreconciled book of approaching 140 investors from around the world has also made it very granular. Despite this success, and the fact that the funding door remains firmly open for other issuers, the primary outlook may start to slow, bankers believe.

Banco Sabadell brought the first deal in nine months from a second tier Spanish issuer on Monday. Rather than wait for a second round of ECB long-term refinancing operation (LTRO) funding, the borrower opted for a more expensive funding option to show the market and rating agencies that it still has wholesale access.

Spain’s Catalunya Banc and Italy’s Cassa depositi e prestiti (CDP) are the latest issuers to announce tenders, though CDP is winding down its cover pool rather than attempting to bolster capital. A successful exercise for Catalunya could prompt other Spanish issuers to follow suit, though covered bond analysts said investors have been unwilling to let go of Cédulas in the secondary.

In a flurry of activity that offered another glimpse of the spare cash washing around the European banking sector after the ECB’s first Long Term Refinancing Operation (LTRO) in December, Spain’s CatalunyaCaixa and Banco Popular Español launched tender offers this week, buying back ABS, covered bonds and hybrids.

The ECB's Long Term Refinancing Operation could increase the bid for covered bonds through its restorative effect on the senior unsecured market.

Bank of New Zealand returned to the market on Monday with a long three year benchmark, after postponing a five year trade earlier this month. The change of maturity and capped deal size yielded a far more positive result, with over 100 accounts contributing to the most oversubscribed order book of the year.

The secondary market in covered bonds is in danger of breaking, and though it is not there yet, there are concerns over ‘forced delivery squeezes’ in the repo market which may lead to failed trades. Though it has always been the intention of the European Central Bank to improve liquidity, there are some who now say that it is not doing enough. Covered bonds could risk becoming almost like a private placement market if the current situation persists.

Covered bond spreads have survived sweeping sovereign downgrades by Standard & Poor’s on Friday. Only French issuer Dexia was reported wider on Monday morning, while the LTRO cash injection has ensured short dated Spanish and French paper remains highly sought after.

The strong Italian and Spanish government debt auction results on Thursday have helped government bond yields tumble, which is good news for issuers. But with cheap financing from the ECB still on offer and covered bond spreads still wide to the government market, primary issuance prospects remain dim.

The ECB’s unprecedented refinancing operation may hit covered bond supply at the short-end of the curve, but medium and long-term issuance — the mainstay of the covered bond market — could benefit from greater confidence in banks’ health, bankers told The Cover.

Unless sovereign debt market volatility subsides, it seems likely that publicly placed covered bond financing could remain shut for peripheral issuers in 2012, potentially forcing Spanish and Italian banks into the same category as Portuguese and Greek banks which were unable to access the market at all last year.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.