Spain

The torrent of Spanish issuance so far in 2011 has confounded many analysts’ estimations. They predicted it would begin in earnest after Q1, as Spanish covered bond redemptions will reach a record high of Eu22.4bn this year, with the majority occurring in the second and fourth quarters.

The absence of primary flow has resulted in a better bid for higher yielding secondary paper. A few large orders have driven BBVA three year paper in by as much at 75bp from launch levels and, with the spread to second and third tier Spanish banks widening, demand has moved down the credit curve. Despite event risk over Japan, there is talk that a French and Spanish bank, not seen this year, could be poised to issue.

The primary market has got off to a very strong start, with books building on as many as four deals across four jurisdictions. The transactions, which include two tier two borrowers from peripheral markets, have attracted a total of 440 orders worth a combined Eu8bn. The strong showing bodes well for new peripheral tier two borrowers who are said to be lining up with deals this week.

Spanish and Italian banks are expected to take advantage of the bid for peripheral covered bonds, as witnessed last week by the strength of demand in Banca Carige’s trade, two taps from peripheral issuers and Santander’s blow-out deal. La Caixa has mandated for a four year as other Spanish borrowers line up and Italy's Banco Popolare has mandated.

After Bankinter and Banca Popolare Di Milano successfully issued taps on Wednesday, Banca Carige will today price an Eu500m deal on the back of Eu1.2bn demand. Given that the order book and deal size could have been heavily increased, lingering doubts over tier two borrowers’ access to the covered bond market should be dispelled.

The primary market opened with a bang on Monday morning as books on the newly announced Santander four year exploded with Eu4bn of orders. But the strength of demand for this national champion is likely to provide an interesting contrast to Banca Carige, which has embarked on a three day roadshow.

Portuguese banks, with Eu13bn of bonds maturing in 2011, are fast approaching the first anniversary since any of their number last sold a benchmark bond, causing consternation among bankers and putting the spotlight on the European Central Bank ahead of a potential tightening in its provision of liquidity.

The covered bond market remains primed for issuance despite the quietest week so far this year in terms of primary market activity. Spanish borrowers may join Abbey National and Westpac New Zealand in the market next week, though Abbey’s inaugural sterling issue and Westpac’s first covered bond transaction are set to take centre stage.

Taking advantage of demand for high coupon peripheral debt, La Caixa yesterday (Thursday) priced a long awaited Eu2bn five year cédulas hipotecárias. Despite the allure of a 5% coupon and a relatively tight spread to its senior unsecured, the trade was by no means a foregone conclusion in the context of underlying sovereign spread volatility.

The covered bond market is hoping a national champion will soon bring the first Portuguese deal of the year, following the sovereign’s successful bond auction on Tuesday. Elsewhere, Spain’s La Caixa mandated banks for its deal and LBBW is in the market with a dollar benchmark. Meanwhile, the pricing of two German deals on Tuesday went as smoothly as anticipated.

The merger of several Spanish cajas into a private bank, announced last week, will lead to credit positive outcomes and the extinction of multi-cédulas, according to Moody’s.