Nordics

French covered bonds have widened in the secondary market following concern that the sovereign could lose its triple-A rating. Meanwhile traders reported buying in Spanish and Italian covered bonds as investors move out of government paper.

Core European investors are much more pessimistic than two months ago, according to Crédit Agricole’s latest sentiment index, which showed an even greater decline in issuer sentiment. Investors expect further deterioration in Spanish and Italian covered bonds, but at a slower rate than over the last two months.

Moody’s took negative rating action on covered bonds issued by two Danish banks on Thursday, and withdrew the ratings on one. Nykredit Realkredit’s Capital Centre D was downgraded and three of BRFkredit’s programmes were placed on review for downgrade. The rating agency withdrew its rating on Realkredit Danmark’s covered bonds. An S&P report released on Thursday suggests the agency is increasingly bearish about the state of the Danish banking sector.

The fight for the Danish mortgage system will continue, as CRD IV proposals released on Wednesday left undefined which assets would qualify as Level 1 or Level 2 as part of Basel III’s Liquidity Coverage Ratio (LCR).

Finland’s OP Mortgage Bank came to market on Friday with the first seven year Scandinavian covered bond of the year, pricing a no-grow Eu1bn trade. Despite the bank’s prime Scandinavian collateral, the transaction fell just short of Eu1bn of orders.

After more than a week without primary euro issuance, BNP Paribas and OP Mortgage Bank on Friday broke ranks and opened books on 10 a year and seven year deal respectively. BNP closed books on a well received Eu2bn transaction by mid-morning, while execution on OP’s Eu1bn no-grow deal was less straightforward.

Moody's today announced senior unsecured bond downgrades for three Danish banks. As a result the over-collateralisation levels of the covered bonds issued by these banks needs to be raised to maintain current ratings. Whether or not local banks choose to keep Moody’s and post significantly more collateral is, as yet, undecided, but after Realkredit Danmark’s decision to drop the agency, it’s possible that others will follow its lead.

As the first half of the year draws to a close, the original 2010 predictions for total covered bond issuance in 2011 from most analysts appear exceptionally conservative. Several analysts have revised their estimates, and predictions for covered bond issuance over the next six months are in the Eu80bn-100bn range.

The Greek parliament met market expectations yesterday and approved the austerity bill, ushering in a period of mild relief however temporary it turns out to be. Secondary market flows picked up, particularly for Spanish cédulas which showed stronger buying interest. But covered bond syndicate officials do not expect a long window for primary issuance. CRH and OP bank have been quick to take advantage of the more positive mood with the former raising Eu1bn of 11 year funding via a tap and the latter mandating leads for a seven year to be priced tomorrow.

Covered bond bankers expect the Greek parliament to approve austerity measures in today’s vote, but even if that happens, they do not expect much of a relief rally. If the measures are not approved then it’s likely that the consequences will be catastrophic.

Following Amagerbanken's collapse, Denmark’s Fjordbank Mors has become the latest bank casualty after it failed to meet the local regulator’s solvency requirements. The bank’s failure comes amidst growing concern over the country’s high household indebtedness and increased rating agency scrutiny of local covered bond programmes. Realkredit Danmark and Nykredit have both restructured their covered bond pools, isolating adjustable rate mortgages. Other issuers are expected to follow. And, in response to Moody’s increasingly draconian approach, Realkredit has dropped the agency.

Issuers are waiting for some better news out of Greece before deciding whether to press on with transactions, despite most receiving strong interest during roadshows. After selling in the secondary market on Thursday, sovereign spreads on Friday tightened on rumours of an aid package for Greece. But with market sentiment yo-yoing from one day to the next, any window for issuance before the summer lull is likely to be narrow, and perhaps too risky for first time euro borrowers such as ANZ Bank.