United States

Fitch downgraded Washington Mutual’s covered bonds from AA+ to AA on Monday, because deterioration in US payment-option and interest-only hybrid adjustable rate mortgages (ARM) has increased loss expectations on the cover pool.

Bank of Nova Scotia on Tuesday printed a $2bn 2.15% five year deal, continuing a recent trend of non-European issuers and markets providing primary covered bond supply.

Primary issuance returned to the covered bond market on Monday when Korea Housing Finance Corporation sold $500m of five and a half year bonds. It is the first deal in the international market since July 5, but market participants say it does not herald a rejuvenation of supply - particularly for Europeans, who were glaringly underrepresented in allocation.

Korea Housing Finance Corporation has opened books on its second ever covered bond, a $500m five and a half year transaction. US book building has yet to commence, but with the book already twice covered on the back of strong demand from Asia and Europe, a good reception seems likely. The deal is expected to price later today.

BNP Paribas has launched the first dollar covered bond index that includes non-SEC registered transactions, which make up nearly all of dollar denominated covered supply. But the French bank will need market interest to legitimise the decision to include bonds that are not allowed on other leading indices, according to market participants.

A change in leadership at the Federal Deposit Insurance Corporation seems unlikely to make the organisation more receptive to US covered bond legislation in its current form. Rating agency DBRS reports that vice chairman Martin Gruenberg believes that in the event of a bank failure, the FDIC and not investors should have first rights on excess covered bond collateral.

HSBC became the latest issuer to tap the dollar market on Tuesday, pricing an inaugural $1.25bn three year deal. In contrast to euro denominated supply, which in H2 2011 is not expected to match the record amount issued in the first six months of the year, dollar issuance is expected to expand. German and Italian issuers are understood to be preparing debut dollar benchmarks, and the South Korean government today encouraged certain banks to increase issuance.

Four major investors talked to The Cover about their near term strategy and thinking. They do not think much will change, even if there is a positive Greek outcome. Though two of them felt sentiment could improve a little if the prospective Bankia IPO is successful, confidence in the banking sector is not in great shape.

After the activity and drama of the first part of the week, Ascension Day holidays across most of Europe have lent a quiet tone to the market and a more sedate close is anticipated. But with as many as five deals mandated and a few others rumoured, the pace is likely to pick up next week.

UBS made its first appearance in the covered market for over a year on Thursday. The Swiss borrower will price later today a three times oversubscribed Eu1bn five year deal, which a syndicate lead said had achieved the tightest pricing in that maturity outside of Pfandbriefe, since the collapse of Lehman Brothers.

US covered bond legislation is creeping ever closer, despite not having universal support. Its backers hope President Obama will sign the act into law before the end of the year. Bill Thornhill reports.

The US House Financial Services Subcommittee has approved the Covered Bond Act 2011. The bill contains new amendments that strengthen and protect investors’ rights. Critically, investors, and not the Federal Deposit Insurance Corporation, continue to have a priority claim on the cover pool assets — both eligible and ineligible. The modified bill is now ready to proceed to the next stage.