Spain

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.

Spanish banks’ issuance of retained covered bonds has surged, said Moody’s on Monday, as refinancing needs and the threat of deposit flight drives issuers to the European Central Bank. Together with defaulting loans and scant growth in mortgage lending, the surge will hit overcollateralisation hard, just as a fresh barrage of Cédulas downgrades are poised to make OC requirements more onerous.

Cédulas are under renewed rating pressure following Spain’s three notch downgrade by Moody’s. The Spanish covered bond market is likely to fall to single-A as a result, thereby further reducing its potential investor base. With the sovereign’s rating still fragile, additional downgrades would threaten issuers’ access to vital European Central Bank repo funding.

After a flurry of trades from four jurisdictions during the covered bond market’s busiest week in months, the Spanish sovereign downgrade foiled hopes for further issuance on Thursday. But German Pfandbriefe issuers have thrived on volatility, while Caisse de Refinancement de l’Habitat has demonstrated the thirst for yield among European investors. As such the setback in core supply should be merely temporary.

Cédulas from strong names tightened on news that the EU is to provide the Spanish banking sector with €100bn in financial aid. But though the move is supportive for secondary levels, Spanish banks have limited issuance capacity in the short term. In addition, saddling the sovereign with new debt could lead to ratings pressure, and Cédulas ratings would not survive a sovereign downgrade.

The UK’s Clydesdale Bank has finished a domestic roadshow and could launch an inaugural benchmark mid-week after receiving final investor feedback on Tuesday. Australia’s Suncorp Bank, meanwhile, is expected to announce a formal mandate for its own domestic debut later in the week.

Europe’s peripheral covered bond markets are looking over their shoulders after Fitch downgraded Banco Popular Portugal’s covered bonds on Wednesday. This followed downgrades of Greek and Cypriot covered bonds which have left their issuers unable to access emergency ECB repo funding.

The axe of Moody’s has fallen on Cédulas as the agency continues its European wide review on financial institutions. Unlike their Italian peers, many Spanish covered bonds remain double-A rated, and all retain vital access to ECB funding while the primary market becomes ever more elusive.

Moody’s downgraded six Italian covered bond programmes in the first step of a review of 114 banks across 16 European countries. The sweeping cuts left only Intesa San Paolo and UniCredit with double-A ratings and consigned the rest of the Italian covered bond sector to single-A.