Spain

The European covered bond market is stabilising on Friday, with buyers reported in French and Scandinavian names. But the Spanish market remains shaky, and though selective bids returned the macro sovereign backdrop deteriorated after Thursday's brief impovement.

Covered bond supply should restart next week given a stable opening, said syndicate officials on Friday, and several issuers are looking to launch trades. But with upcoming elections in France and the market still full of uncertainty after the renewed volatility of early this week, headline risk could keep second quarter supply muted.

The value of collateral backing Cédulas and RMBS came under increased scrutiny on Thursday following the publication of Banesto’s first quarter results. Unlike in many jurisdictions, Spanish cover pools are not indexed to the declining value of house prices, with the result that they can quickly become overstated.

Spread tightening has stalled after the first quarter rally, according to DZ analysts, who urged investors to reposition themselves in preparation for spread widening. But with many investors still on holiday, the secondary market has become easier to move with smaller tickets, and traders said it was too early to draw conclusions from an increase in selling.

Sovereign markets have started to stabilise but covered bonds have lagged this move and remain under pressure in the secondary market. The focus has been on Spain but dealers also reported weakness in French covered bonds. In the primary market, issuance hopes remain dim, though bankers think there may be room for a Swedish or Finnish deal.

Axa Bank Europe SCF launched its third and largest euro benchmark covered bond on Tuesday, pricing a €1bn trade at the tight end of guidance. Investors seemed untroubled by the rare RMBS collateral, allowing Axa to follow recent French trades in offering a minimal new issue concession.

Moody’s provided a timely reminder that all is not right in the state of Spain on Monday. Following a 41% year-on-year decline in mortgage lending, over-collateralisation levels have eroded, it said. The news came against a background of Cédulas selling as concerns mounted for the country’s banking sector, with non-performing loans soaring and house price falls accelerating.

Investors are fed up with focusing too much on the strength of issuing banks to value covered bonds. Now they are demanding more details about the underlying assets. But baring all is not necessarily the solution for borrowers either.

Top tier names can offer zero premiums on primary trades but lower ranked issuers have no such luxury, syndicate officials told The Cover on Monday.

After a four week gestation period, Bankinter priced the first Spanish deal since February 22, and its first funding since January 2011. The transaction was remarkable, not just for its size and pricing, but particularly for its tenor — which at five years, was well beyond the LTRO supported three year point.

Spain’s Bankinter launched a long awaited benchmark on Monday, pricing only the fourth euro jumbo in as many weeks. Spreads could widen suddenly if conditions deteriorate, warned analysts, but with supply scarce and curves steep between three to five years, investors will continue to ride the wave of optimism.

Barring a poor outcome from Greece’s private sector initiative, primary supply is poised to pick up, said syndicate bankers, who advised issuers to launch trades while the market remains receptive. Covered bond analysts are lowering their euro benchmark forecasts, however, and investors are concerned about declining issuance.