Spain

Covered bond issuers in core Europe have been taking steps to protect their southern European subsidiaries from currency reform should Spain or Italy be forced to abandon the euro.

Multi-cedulas suffered a swathe of downgrades from Standard & Poor’s on Thursday, but analysts and hedge funds say that deeply discounted prices of long-dated bonds look attractive.

European covered bond issuers, along with senior unsecured financials and investment grade corporates, were this week presented with excellent funding conditions, despite a ratcheting-up of pressure on Spain and Italy in the early part of the week.

Standard & Poor’s has resolved rating watches on 12 multi-Cédulas and, in a rare move, even upgraded five other programmes. But hedge funds and fast money buyers continue to dominate interest in the multi-issuer asset class, despite some ratings being as high as double-A.

A new type of Cédulas backed by export finance loans is being lined up to help ease funding pressures on Spain’s banks. The Spanish government has set out a legal framework for Cédulas de Internacionalización (CI) which should be repo eligible. However, the market is likely to be a small with limited rating de-linkage to the issuer.

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

CaixaBank has written to its fixed income investors to explain why it has bolstered its emergency liquidity reserves, and the effect that this has had on its balance sheet. Bank treasury officials told The Cover it still has plenty of assets available on its balance sheet and confirmed that overcollateralisation would remain close to historic levels — many times higher than the legal minimum.

Increasing reliance on secured issuance and the impact that this has on senior unsecured recoveries could be factored into ratings, Fitch said on Thursday, though it added that the increase in outstanding covered bond issuance is relatively stable for the time being.

Investors are increasingly fretting over their Cédulas exposure following a round of Spanish bank rating downgrades on Monday. With much of the market likely to slip below investment grade, the spectre of forced selling is looming. But with bids difficult to find in the secondary market, investors have so far pursued a range of options that have allowed them to avoid crystallising losses.

The results of stress tests conducted by consultancies Oliver Wyman and Roland Berger on Spanish banks are unlikely to improve sentiment on Spanish Cédulas, analysts said on Friday.

There has been plenty of interest in core and even peripheral names in the secondary market this week, especially at the long end, where investors have been tempted by juicy Spanish yields. A briefly negative basis in covered versus CDS spurred interest.

Spanish covered bonds are set to lose the support of bank treasuries and insurance accounts due to ratings triggers. As a result Spanish issuers face a world of credit buyers and senior level spreads as the Cédulas sector slides towards single-A, Crédit Agricole said analysts on Wednesday.