Spain

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.

Insurance companies will increase their holdings of covered and government bonds, while reducing their allocation to equity and long term corporate bonds, according to a report from the Bank of International Settlements.

Dealers and investors remain shell shocked by recent events. Despite relatively upbeat comments from the buy side and a continuation of the spread correction, reported secondary activity has been muted. Syndicate bankers are looking towards stabilisation of the Bund/swap spread and do not rule out the prospect of issuance, though it may be limited to taps.

Secondary market dealers reported little trading activity on Tuesday and described the market as being dysfunctional. Despite that, some participants are trying to take advantage of this price opacity. After opening very weak, the market has bounced back on rumoured central bank intervention.

Hopes for further covered bond issuance have been dashed by peripheral volatility centring around Italy and poor US employment figures, which have weakened market sentiment across asset classes. Prospective issuers are electing to wait, and with holidays in core Europe fast approaching, benchmark supply appears unlikely.

Fitch downgraded Spanish issuers Bankinter and Banco Popular Español on Wednesday. Bankinter was cut from A to BBB+, on stable outlook, and Fitch has now withdrawn all ratings assigned to the borrower. Banco Popular Español was lowered from A- to A, on negative outlook.

Though the covered bond market remained quiet on Thursday, syndicate officials stressed it had not yet closed for summer. Investors still have cash to put to work, and there is at least one trade expected next week. Negative rating action has damaged market sentiment, however, and closed the window for some peripheral names. Prospective issuers face a forbidding market and increased premiums should they decided to issue.

The primary market has been dominated by core supply particularly weighted towards the long end, but a real test of tier two bank issuance, or tier one names from peripheral jurisdictions, has yet to be seen. The timing could be about right for UK, Spanish and Italian deals to enter the market.

Following a transfer of La Caixa’s banking activities to CaixaBank, Moody’s has assigned a Aaa rating to mortgage backed covered bonds now assumed by CaixaBank.

As the first half of the year draws to a close, the original 2010 predictions for total covered bond issuance in 2011 from most analysts appear exceptionally conservative. Several analysts have revised their estimates, and predictions for covered bond issuance over the next six months are in the Eu80bn-100bn range.

Covered bond bankers expect the Greek parliament to approve austerity measures in today’s vote, but even if that happens, they do not expect much of a relief rally. If the measures are not approved then it’s likely that the consequences will be catastrophic.

Fitch downgraded Banco de Sabadell and Banco Español de Crédito (Banesto) on Wednesday, because of exposure to the Spanish real estate sector and the weak economic environment in Spain.