Spain

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.

S&P cut Spain by two notches to triple B plus on Thursday night, leaving the sovereign precariously close to junk. And although government bonds have lurched 20bp wider, the Cédulas market has shown a stoic response. But the rating agency’s move came as Banco Popular also announced a jump in non-performing loans in its first quarter results – concentrating minds on the country’s unfolding real estate crisis to which Cédulas are inextricably linked.

Canadian issuers will no longer be able to use insured mortgages as collateral for covered bonds. Finance minister Jim Flaherty introduced a bill into the Canadian parliament on Thursday that will create a register for covered bond issuers. The bill will also prohibit the use of mortgages insured by private insurers or by the government backed Canadian Mortgage and Housing Corp (CMHC).

Rising unemployment in Spain could hit residential mortgage portfolios, JP Morgan analysts have warned. An increase in non-performing loans would affect Spanish cover pools, while a lack of adequate measures to deal with mortgage losses means subordinated bondholders could be called on to provide additional capital.

Hopes for imminent covered bond issuance dimmed on Monday as the asked for stability proved elusive. With government spreads still widening and background volatility persistent, even top issuers will have to offer positive new issue premiums to compensate buyers, said syndicate officials.