Italy

The concept of liquidity has changed over the course of the financial crisis. Where once it may have been viewed as a free ticket, it is now highly valued — for without liquidity there cannot be a market. Covered bonds are comfortably at the most liquid end of the credit spectrum, but the way they are traded has completely changed since the onset of the financial crisis.

The underlying tone to the primary and secondary covered bond markets remains broadly supportive. Though the wider credit market is clearly still dealing with considerable uncertainty, for the right name and spread, investor demand is there — as evidenced last week with deals from Hypo Noe and CRH. The time could therefore be ripe for more French, Austrian or German names to step in. But whether the market is ready for the rumoured BBVA deal remains to be seen.

The Italian Department of Treasury is considering introducing a new instrument, separate from OBGs and securitisation, that would allow banks to use a wider range of assets for funding. Though only in a discussion phase, the move may see Italian issuers join their French and German counterparts in using structured covered bonds to alleviate funding pressure.

Italy should amend its Obbligazioni Bancarie Garantite law to reduce refinancing risk in the event of an issuer default and give investors a better chance of a full recovery, a conference in Milan heard this week.

Secondary activity in the covered bond market is picking up, with a slew of deals and merger activity spiking interest. DexMA is performing but Dexia Kommunalbank is rudderless. Banco Pastor has tightened and Caixa Catalunya has seen some interest. Tier one French names are also enjoying better selling. More generally, stronger ECB rate cut expectations mean the short end is well supported.

Traders reported muted flows in the secondary market on Wednesday ahead of Thursday’s ECB meeting, amid intense speculation that another round of covered bond purchasing could be announced. Italian bonds have reacted remarkably stoically to the republic’s triple notch downgrade — although this might be due to the absence of bids for second tier institutions.

Moody’s three notch downgrade of Italian sovereign debt, from Aa2 to A2 with a negative outlook, will heap more pressure on ratings of Italian banks, which could have a knock-on effect on covered bond ratings, said research analysts.

Fitch revised its outlook on Intesa Sanpaolo from stable to negative, on Wednesday, and affirmed the issuer rating at AA-

Secondary markets broadly remain under pressure, though there are cracks of light appearing here and there. The long end of the French market seems to be stabilising, there have been some buyers of Cédulas and there is still a smattering of interest in selective Scandinavian names. But the outlook remains dim and relative value against other sectors suggests covered bonds are expensive.

Italian CDS reached a record wide on Thursday morning as confidence in the country’s credit health and political response to the crisis decline. Covered bond analysts have altered their stance on Italian covered bonds, with a stagnant housing market, weak economic prospects and a lack of political consensus making the outlook increasingly negative.

Italian covered bonds have widened further following Standard & Poor’s downgrade of the sovereign’s credit rating from A+ to A on Tuesday but the covered bonds issued by UniCredit and Intesa Sanpaolo have outperformed BTPs, although in a very illiquid market.

Markets opened poorly on Monday morning and hit record wides in some indices, after concerns about Greece’s ability to meet its austerity commitments dominated weekend headlines. Syndicate bankers touted Tuesday as the day to bring a deal if market conditions were constructive, but the volatility means they expect no primary supply this week.