UK

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.

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.

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.

The covered bond sector saw only one trade this week, a small German deal from an inaugural issuer — precisely the sort of funding that would be expected to work in a difficult market environment. The outlook for next week does not look much more promising either — although there is a fair chance HSBC will issue its inaugural dollar benchmark.

Germany’s ING-DiBa kept primary supply alive on Wednesday, pricing one of the tightest five year covered bonds of the year. As an inaugural Pfandbrief, Eu500m in size and five years in maturity, the trade was never likely to struggle. Syndicate officials expect no further issuance this week, however, as few borrowers can bring deals which boast similarly attractive qualities.

UK covered bond issuance hit record levels in the first half of 2011, attracting greater interest from banks and central banks compared with last year, research from Barclays Capital has shown. All UK programmes offer good value compared with core paper, but Barclays’ pick for investors is Abbey, whose spreads have widened because of concerns over exposure to Spain.

The covered bond market was quiet on Thursday, though syndicate officials said there were several borrowers that would like to complete trades before the summer lull. Prospective issuers have ample reasons to wait given that a resolution of the situation in Greece appears elusive. However issuers in the UK, New Zealand and Germany will have finished roadshows by the week’s end, and Italian and French names are monitoring the market.

Demand from insurance companies and pension funds for covered bonds has increased this year, according to Barclays research, while interest from central banks and asset managers has fallen. Germany and Austria are the only regions where overall investor interest for covered bonds has decreased noticeably, though in some jurisdictions investors have participated far less in issuance from certain countries.

Westpac New Zealand became the second ever Kiwi bank to issue a euro covered bond when it priced a Eu1bn five year deal on Thursday. Fund managers and central banks snapped up the paper, seeing good value relative to core issuers, and took the opportunity to make investments away from European volatility. Investors will be eagerly anticipating further issuance out of New Zealand, with ANZ NZ next in the pipeline.

Borrowers from peripheral and core jurisdictions priced over Eu6bn worth of benchmark covered bonds across three currencies this week, which included inaugural deals from Italian and New Zealand issuers. Prospects for supply next week are similarly diverse, though volatility and European holidays may narrow the window for issuance.

Moves by the UK’s Independent Commission on Banking to increase protection for UK depositors and taxpayers could have the opposite effect, according to Deutsche Bank research.