Under the covereds
Covered bonds were clearly a favoured asset class for banks’ euro issuance at the start of 2019. While the first months of any year tend to be the most active for covered-bond issuance, market sources say the end of the European Central Bank (ECB)’s buying programme increased the product’s value for investors.
Karlo Fuchs, executive director, covered-bond ratings at Scope Ratings in Frankfurt, tells KangaNews there was around €60 billion (US$67.7 billion) of benchmark covered-bond issuance in Q1 2019, a 25 per cent increase in volume from the first quarter of 2018 and the highest amount since 2012. This issuance surge was in part the product of a general risk-off tone. But there are also signs of covered-bond-specific demand enjoying a resurgence.
Fuchs says demand for the product has been suppressed in recent years due to negative interest rates. With the ECB’s asset-purchase schemes now winding down and spreads widening as a result, Fuchs tells KangaNews a larger group of investors have begun to find covered bonds appealing as new-issue spreads have finally moved back into positive territory.
“Bank treasuries have become the predominant covered-bond buyers while the share of central banks has decreased significantly,” he reveals. “Central banks were accounting for around a third of covered-bond deals but they are now typically in the mid-teens. Banks were also at around a third but are now accounting for around 50 per cent of transactions.”
George Kalbin, FIG syndicate at Crédit Agricole, says this theme is playing out across asset classes in Europe. He tells KangaNews: “The activity of the ECB since 2015 had been squeezing out other investors on price and liquidity in covered bonds. Now this has ended a lot of investors are seemingly eager to participate in deals once again.”
The ECB has, however, announced another round of targeted longer-term refinancing operations which will provide funding for banks in the more credit-stressed areas of Europe. The impact on capital markets is still largely unknown.
Central banks were accounting for around a third of covered-bond deals but they are now typically in the mid-teens. Banks were also at around a third but are now accounting for around 50 per cent of transactions.
Even with senior asset classes now performing well, market users say structural factors should support further covered-bond issuance. According to Lloyds Bank’s head of public senior funding and covered bonds, Peter Green, the progress most issuers have made in fulfilling total loss-absorbing capacity requirements in recent years has paved the way for many now to consider a cheaper source of funding.
Andreas Wein, head of funding and debt investor relations at Landesbank Baden-Württemberg, adds: “We remain convinced of relatively attractive pricing for euro covered bonds in 2019. For issuers seeking duration, size and reliable execution, it remains the asset class of choice. In light of economic challenges, the product also helps to reduce market volatility for investors.”
“Central banks were accounting for around a third of covered-bond deals but they are now typically in the mid-teens. Banks were also at around a third but are now accounting for around 50 per cent of transactions.”
