Spain

A major covered bond investor talks to The Cover about the ECB’s purchase programme and what could follow. He does not think it will adopt a needs-based approach and suspects that a prospective spread tightening will be short-lived.

Peripheral covered bonds tightened against government debt on Monday, undoing sovereign outperformance following last Thursday’s rally. Bid offer spreads continued to widen across the board as participants remain cautious ahead of purchase programme details.

The covered bond market remains on hold while it waits for news from the EU summit, the ECB meeting and details of the covered bond purchase programme. Despite continuing systemic doubts, bankers believe the market is open for the right name at the right spread. But even if a solution is unveiled, underlying issues driving the sovereign crisis are expected to resurface — unless the ECB’s mandate is changed.

Secondary activity in the covered bond market is picking up, with a slew of deals and merger activity spiking interest. DexMA is performing but Dexia Kommunalbank is rudderless. Banco Pastor has tightened and Caixa Catalunya has seen some interest. Tier one French names are also enjoying better selling. More generally, stronger ECB rate cut expectations mean the short end is well supported.

Moody’s has placed Banco Popular’s ratings on review for downgrade following an exchange offer from the bank for 100% of Banco Pastor’s shares and mandatory convertibles.

Traders reported muted flows in the secondary market on Wednesday ahead of Thursday’s ECB meeting, amid intense speculation that another round of covered bond purchasing could be announced. Italian bonds have reacted remarkably stoically to the republic’s triple notch downgrade — although this might be due to the absence of bids for second tier institutions.

Covered bond market participants are firmly focused on Thursday, when the ECB could announce another round of covered bond buying. Regardless of market conditions, a deal on Monday was always going to be unlikely because of German holidays. But the weak market opening has made a deal between now and the ECB meeting more tricky — particularly for the smaller names that dominate the pipeline. Covered bond traders reported a very quiet morning, with customers unwilling to take a position before Thursday.

Approval to create a new banking group, Kutxa Bank, has prompted Fitch to place the Long-term Issuer Default Ratings (IDR) and Viability Ratings (VR) of two of the three merging cajas, Bilbao Bizkaia Kutxa (BBK) and Kutxa, on Rating Watch Negative.

Moody’s placed Cédulas Hipotecárias issued by Unicaja on review for downgraded yesterday, and those issued by Caja España de Inversiones, Salamanca y Soria’s (CEISS) on review for upgrade.

Secondary markets broadly remain under pressure, though there are cracks of light appearing here and there. The long end of the French market seems to be stabilising, there have been some buyers of Cédulas and there is still a smattering of interest in selective Scandinavian names. But the outlook remains dim and relative value against other sectors suggests covered bonds are expensive.

Cédulas and multi-cédulas continue to fall under the gaze of rating agencies, with Moody’s putting Banco CAM’s cédulas programmes on review for downgrade and Fitch placing two of Banco de Valencia’s multi-cédulas hipotecarias on rating watch negative. The downgrades come as bankers complain that rating agencies have overlooked certain strengths in these deals.

Crédit Agricole CIB has hired Nicolas Poli as global head of SSA and covered bond trading from Bank of America Merrill Lynch where he had worked for three years as director of SSA and covered bond trading. He will aim to build the bank’s dollar denominated SSA and covered bond trading platform.