Spain

Record covered bond issuance almost reached parity with senior unsecured issuance in the first quarter of 2011, a trend that is unlikely to be reversed by demand constraints on the product, said bankers this week. But widening spreads between the products could put the brakes on.

Amid renewed supply from core issuers, and ratings pressure on peripheral jurisdictions, Kutxa (Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián) launched its second ever standalone benchmark deal on Thursday.

Covered bond secondary market levels have remained largely unaffected by Moody’s downgrade of 18 Spanish covered bond programmes on March 25, which followed a downgrade of the borrowers’ issuer ratings. Although all the downgraded institutions remain under review, or on negative outlook, market traders said the immediate effect of the cuts has been negligible.

The Netherlands NIBC Bank brought primary market activity to a close this week, launching an inaugural Eu500m three-year deal on Friday via leads LBBW, Natixis, and RBS, which priced the new issue at 105bp over mid swaps.

Caja Madrid became the latest Spanish name to come to market on Wednesday, though it did not enjoy the tight pricing of its compatriots. Its Eu750m three year cédulas hipotecárias came in the wake of twin Spanish deals from Banesto and BBVA on Monday, which priced inside initial guidance.

Banco Espanol de Crédito sold a Eu600m no grow issue off the back of one of the borrowers largest ever order books on Monday.

Banco Bilbao Vizcaya Argentaria priced the lowest yielding covered bond from a Spanish issuer in the last year on Monday.

Twin Spanish mandates in four year maturities from Banco Bilbao Vizcaya Argentaria and Banco Espanol de Credito, opened the market on Monday, after a week with scant primary activity, though strong secondary trading in cédulas.

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.