UK

Prospective issuers stayed out of the European covered bond market on Thursday, ahead of the afternoon ECB interest rate announcement and press conference in Frankfurt. A deal is highly unlikely on Friday, which means the week will probably end without any European supply at all. Looking ahead, Norway’s Terra Boligkreditt finished its roadshow on Wednesday and may be the prime candidate to resume euro supply early next week — as long as weekend headlines don’t spook markets.

Market participants were not swayed by a moderate rally in sovereign CDS and senior financials on Wednesday morning, preferring to hold out for a more stable backdrop. But with an ECB meeting in Frankfurt on Thursday and the Euromoney covered bond conference and ECBC plenary taking place on 14-15 September, opportunities for issuance might be limited to early next week.

After €5.75bn of covered bond deals on Tuesday, including a €2bn three year offering from compatriot Barclays, RBS took advantage of the continued window for issuance on Wednesday morning with its own €2bn deal in the same tenor. Investors again showed demand for UK paper, allowing the issuer to price several basis points inside the wide end of guidance.

French, UK, Swedish and Austrian issuers launched deals across the covered bond curve on Tuesday, as the market backdrop continued to improve. Caisse de Refinancement de l'Habitat and Austria’s Erste tapped the longer end (see separate story), while Barclays Capital and Swedbank launched three and four year trades respectively.

Analysts warned about the outlook for UK banks this week, saying their cost of funding will rise if ring-fencing proposals are implemented.

Purchases of government debt by the ECB stalled a rise in Spain’s borrowing costs and resulted in its sovereign CDS dropping from over 400bp to 350bp at the end of last week. On Monday morning Spanish and Italian government bonds tightened slightly against Bunds, though Spain’s CDS widened out to 375bp, with market participants concerned over the lack of a long term solution to the sovereign debt crisis.

After a week of severe fluctuations in all market segments, traders said Monday morning was the quietest day in weeks. Market participants are hoping for a modicum of stability to improve the chances of primary supply at the end of the month and several issuers from core jurisdictions are finalising roadshows in order to come to market, syndicate bankers said. But if new issue premiums are at the top end of expectations, they added, it will reshape the secondary curve — and this may deter some names from returning.

Moody’s confirmed covered bonds issued by Nationwide Building Society and Coventry Building Society at triple-A on Monday, and removed them from negative review. As the only large UK covered bond issuer at risk of a ratings downgrade, Deutsche Bank analysts said Nationwide’s retention of a triple-A rating for its covered bonds was clearly positive.

Core European investors are much more pessimistic than two months ago, according to Crédit Agricole’s latest sentiment index, which showed an even greater decline in issuer sentiment. Investors expect further deterioration in Spanish and Italian covered bonds, but at a slower rate than over the last two months.

Covered bond practitioners say the release of Capital Requirements Directives IV is positive for the sector and broadly similar in outlook to the draft version of Basel III that sealed a structural bank bid for the sector. There have been changes in the way covered bonds are treated by the Liquidity Coverage Ratio, and potentially in the way the Net Stable Funding Ratio is applied. Underlying market sentiment remains negative, as many believe that the sovereign debt crisis is only just beginning.

Standard & Poor’s cut Bank of Ireland’s UK covered bond programme from A+ to A- and removed it from credit watch negative, though all covered bonds issued under the programme remain on negative outlook.

West Bromwich Building Society has postponed its Kenrick No. 1 RMBS, following intense market speculation about the deal’s fate on Thursday. The society’s decision comes at the end of an exceptionally difficult week for Europe’s capital markets including the ABS market. Santander Germany postponed an auto ABS and Banca Etruria held back an Italian RMBS as a result of market volatility on Tuesday.