UK

The covered bond primary market continues to enjoy good momentum, with as many as four issuers collectively raising the equivalent of around €5bn in the four to 12 year area across two currencies.

Despite being the most expensive UK covered bond in sterling, Barclays Bank’s inaugural benchmark which priced on Thursday, met with a resoundingly strong reception – boding well for follow on deals from RBS, other UK issuers and possible other European names too.

DNB Nor and Lloyds came to market on Wednesday with five year offerings that enjoyed a healthy oversubscription. German investors and bank treasuries drove the trades for the non-eurozone credits, enabling both to price at the tight end of guidance. But in terms of spread, the difference of nearly 120bp showed that the similarities ended there.

The covered bond primary market has opened strongly with a trio of top tier names from core jurisdictions collectively raising around €4.5bn on comfortably oversubscribed books. A further seven deals have been mandated for issuance in the near future. This impressive showing is to be expected given liquidity is technically strong. Yet big challenges lie ahead, specifically for peripheral markets — where borrowers remain shut out.

Singled out for special treatment by European regulatory initiatives, covered bonds were the funding tool of choice for the region’s banks in 2011. But an escalating Eurozone crisis meant the record-breaking market entered 2012 relying on state support.

Lloyds TSB has mandated Barclays Capital, Natixis, and UniCredit, alongside itself, as leads for a euro denominated covered bond early in the new year. It will be the UK borrower’s first benchmark covered bond since March.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

Citi has lost one of its covered bond specialists, leaving the firm’s FIG team to take responsibility for the secured funding product. The move comes amid suggestions that other banks could look to do the same in order to reflect the covered bond market’s shift from being a rates product to a more credit-orientated instrument.

Barclays raised €750m from two taps at either end of the curve, in spite of increasing concern that Standard & Poor’s could downgrade France, several other European countries, and the EFSF.

Covered bonds will become an increasingly important bank finance tool in 2012, but their growing stature will not offset a continued downward ratings migration, Moody’s said in its 2012 outlook. The sovereign debt crisis will heap more pressure on issuer ratings and increase refinancing risk, particularly in Italy and Spain but also in core Europe.

The UK’s FSA has unveiled its policy on regulated covered bonds. It has made the case for loan level data provision and said why stratification is not good enough, in its newly-released policy document.

UK issuers approach 2012 sporting a strong domestic investor base and a tightened framework, having retained market access through some of the most volatile periods of 2011.