North America

Westpac and Commonwealth Bank of Australia (CBA) started US roadshows on Monday and will go into investor meetings with expected/provisional triple-A ratings secured for their programmes. All four Australian banks with covered bond programmes now have provisional triple-A ratings from Moody’s and Fitch. But National Australia Bank (NAB) is winning the race to issue Australia’s first covered bond, after completing its US and European roadshow last week and mandating for a dollar transaction on Friday.

The UK’s Co-operative bank has sidestepped European turmoil and swap costs by choosing to bring its inaugural 10 year transaction in sterling. After finishing a roadshow earlier in the week the issuer sold its debut benchmark at the tight end of guidance against an improved market backdrop, with an attractive new issue premium.

Activity has once again shifted into dollars, with European investors paralysed by a lack of detail on the upcoming ECB covered bond purchase programme and a resolution of the sovereign debt crisis. Meanwhile Canadian banks issue dollar deals with ease, and Australia’s big four could be swayed into taking the same route for their respective debuts, said syndicate officials.

Since its inception in 2008, Canada’s covered bond market has grown steadily to become the cornerstone of US dollar supply. The next step will be the enactment of a covered bond law which will allow Canadian banks to reach investors across the globe. Between regulation and legislation, however, Canadian covered bond issuers face stringent limitations on the product’s use.

Market indices rallied on Thursday, following the EU’s unveiling of its Grand Plan to remedy the eurozone’s woes. BPCE was quick to capitalise on the upturn, securing nearly four times oversubscription for a minimum €200m tap of its 10 year. Bank Austria also moved swiftly on the positive mood and is taking IOIs for possible pricing this afternoon or Friday. Bank of Montreal showed the strength of US demand on Wednesday, when it attracted $3.75bn of demand for its $2bn three year deal. But the floodgates are unlikely to open fully ahead of November 3 when the ECB will announce details of its purchase programme.

German issuers with US dollar assets in their cover pools may start looking at the US 144A market early next year, following the German Association of Pfandbrief Banks (vdp) first US roadshow in three years.

Europe’s banks need to give US covered bond investors more detail and with more frequency if they are to retain access to the coveted buyer base, fund managers have told the industry.

In a panel on new markets at Wednesday’s European Covered Bond Council plenary session it was stated that much hyped US covered bond legislation might not materialise until 2014. But with the OCC and not FDIC likely to be the US covered bond regulator for big banks, a market size of up to $640bn is seen. The Canadian covered bond market is likely to lack homogeneity as non federally regulated borrowers are excluded from the law.

Crédit Mutuel-CIC Home Loan SFH kept the euro market alive on Tuesday with an increase of an outstanding 10 year trade. The €200m tap is the sum total of primary issuance in the last week, though Canadian Imperial Bank of Commerce proved the dollar segment’s resilience to market volatility by taking supply over the same period to $7bn.

Against a backdrop of pervasive hesitancy in the euro market, triple-A rated Toronto Dominion Bank launched the largest ever dollar deal on Wednesday. The $5bn dual tranche trade broke the record held by HBOS, which sold a $3bn 10 year trade in 2007.

Following the US downgrade, the dollar market for triple-A rated bonds has been reduced from around $15,000bn to $136bn, closing the market to dedicated triple A buyers. Covered bonds should benefit, but with up to 40% likely to be downgraded within a year, buyers will need to be selective.

Fitch downgraded Washington Mutual’s covered bonds from AA+ to AA on Monday, because deterioration in US payment-option and interest-only hybrid adjustable rate mortgages (ARM) has increased loss expectations on the cover pool.