UK

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.

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.