Real money investors are
returning to covered bonds and the market is Getting Back on Track, according to key investors and issuers who took part in The Covers roundtable that was held
in February in conjunction with Crédit Agricole CIB.
Portuguese covered bonds were steady on Friday following news that a Portuguese court had granted a provisional injunction against Bank of Portugal (BdP), and following a concern raised on Monday by Moody’s that Portuguese covered bond holders could lose their priority claim. The news emerges as DBRS decides on Friday whether to maintain its investment grade rating on Portugal, without which government bonds would not qualify for the ECB’s purchase programme.
The Financial Conduct Authority (FCA) has outlined plans to speed up approvals for wholesale debt issues listed in London, a change which it hopes will particularly benefit borrowers from outside the EU, and ABS and covered bond issuers.
Türkiye Vakiflar Bankasi, or VakifBank, this week issued the first publicly syndicated Turkish covered bond, sending a powerful message to other Turkish banks and emerging market issuers that the investor base is wide open and eager for more EM names.
The dollar denominated covered bond market has tightened further this week maintaining its long term trend. Funding levels are now looking more interesting for a number of regular dollar denominated covered bond issuers that have yet to make an appearance this year.
Berlin Hyp has increased the volume of mortgages eligible for its Grüner Pfandbrief, or Green Pfandbrief, by more than 50%, suggesting a second deal from the lender could soon be on its way.
German bonds may be the tightest asset class in the covered universe, but their relative value has improved lately and the market looks cheap relative to Bunds and French covered bonds, say analysts at Citi research.
Vakifbank’s euro Turkish covered bond is good for investors, good for emerging markets borrowers and good for the global economy. But the deal would probably never of happened without the intervention of the European Central Bank.
Capital markets were roaring this week, but despite increasing signs of frothiness, the euphoria looks set to persist for some time longer.
Several covered bond issuers have removed the swaps in their covered bond programmes, in the face of onerous regulatory obligations. This has improved their funding efficiency and given investors a less risky, more transparent, and potentially higher yielding product. Others should follow.
Moody’s has favourably adjusted its Asia Pacific covered bond rating assumptions with respect to the likelihood of a payment interruption and the ability of banks to refinance bonds. The changes should lead to less rating volatility and more efficient funding structures.
The soft bullet maturity extension currently being considered for introduction into Germany’s Pfandbriefe law would lower the chance of a payment interruption and could mean issuers need to set aside less collateral to achieve the same rating, said Fitch. Soft bullet bonds would also not be subordinate to hard.
Türkiye Vakiflar Bankasi (Vakifbank) brought a slew of new faces to its investor base when it issued Turkey’s first publicly syndicated euro benchmark covered bond — at an extremely low cost of funding.
The German lender paid no premium for its sub-benchmark sized Pfandbrief, issued on Tuesday.
Compagnie de Financement Foncier took advantage of strong market conditions to issue a long eight year on Monday. Its third covered bond of the year was priced tighter than the previous two and comes as the European Central Bank has become more active in the secondary market.
Covered bonds will help Virgin Money achieve its stated aim of optimising funding costs and extending tenor, especially when taking account of its latest Gosforth RMBS, which gave funding that was both short and more costly compared to covered bonds.
The job of BNP Paribas’ covered bond research analyst, Heiko Langer, has been put at risk.
The covered bond market was relatively unaffected by the oil price-induced credit widening on Monday morning and bankers were hopeful that, despite blackout periods, a few issuers would venture into the market this week, potentially including the first Turkish deal from Vakifbank.
The Eurosystem has had the luxury of being able to maintain its covered bond purchasing rate thanks to an active primary market. But with supply set to slow over the second half of April and dealers’ inventories light, the European Central Bank will be obliged to step up purchases in the secondary market, or slow down the overall rate of buying.
As of April 4 the ECB said it would make its holdings of covered bonds under the first, second, and third purchase programmes available for repo lending. Covered bond traders said the facility would help improve liquidity, but they did not think it was a game changer.
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