Covered Bond & RMBS Comment – Gross supply at EUR 95bn

by: Joost Beaumont

  • Two jumbo euro benchmarks welcomed this week…
  • …taking year-to-date supply to EUR 95bn
  • Primary market open, but activity to remain muted
  • Buyers of Irish paper in the belly of the curve
  • First French RMBS in a year draws modest demand
  • UK prime RMBS Lanark 2016-1 shows Brexit impact

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Two non-CBPP3 jumbo benchmarks arrived this week

The euro benchmark covered bond market welcomed two non-CBPP3 eligible jumbo deals this week, raising EUR 2.5bn in total. This brought issuance of euro benchmarks to almost EUR 95bn so far this year, which compares to EUR 79bn during the entire January-July period last year. The deals, with one priced at a slightly negative yield, attracted strong demand, showing solid investor appetite. As such, more deals might follow, although activity is likely to remain muted in our view due to a number of banks still being in their black-out periods as well as the summer holidays.

Spreads stable in secondary market

The secondary market made a quiet start yesterday in the run up to the ECB meeting. After the meeting, we saw a bit more flow, with some buyers of Irish paper in the belly of the curve. Furthermore, there were sellers of French names, also in the belly. Spreads ended the day roughly unchanged. The new CBAAU performed well during its first full trading day, with spreads tightening by around 6bps.

Modest demand for French RMBS SapphireOne Mortgages 2016-1

Yesterday, the price guidance was published of the first public French RMBS transaction in about a year. The spread of SapphireOne Mortgages 2016-1’s class A notes (AAA/AAA, WAL 2.27yrs, CE 17.7%, ABSPP eligible) has been set at 3mE +50bps, which was at the upper end of the IPT. The tranche is 1 times covered. The spread of the class B notes (AA/AA, 3.08yrs, CE 13.6%) is set at 3mE +120bps, while that for the class C tranche (A/A, 3.08yrs, CE 10.8%) is 3mE +200bps. Finally, the spread guidance of the class D notes (BBB/BBB, 3.08yrs, CE 8.5%) is 3mE +300bps.

Overall, guidance of these tranches is also set at the higher end of the IPT, which suggests that demand is somewhat modest. Indeed, the coverage of the class B, C, and D notes is 1.1x, 0.9x, and 0.7x, respectively. The minimum size of the deal is expected to be EUR 750mn and pricing will probably be today.

GBP 750 mn raised with prime UK RMBS Lanark transaction

Clydesdale Bank raised GBP 750mn with the first prime UK RMBS transaction following the UK vote to leave the EU. The transaction consisted only of one class A note (Aaa/AAA/AAA, WAL 2yrs, CE 12%), of which GBP 750mn was sold at 3mL +100bps. This was in line with the IPT, while the book size was reported at around GBP 900mn. The spread compared to that of 3mL +80bps and 3mL +77bps for similar tranches in the pre-referendum transactions Gosforth Funding 2016-2 and Duncan Funding 2016-1, respectively. The spread increase is therefore likely to reflect the change in market conditions since the Brexit vote.

Other news:

* Moody’s noted that the issuance of Slovakian covered bonds could increase going forward, as rising loan demand will increase wholesale funding needs of the country’s banks.

* Fitch affirmed the A+ rating of the covered bonds issued by AIB Mortgage Bank. There is no rating buffer.

* Moody’s reported that the performance of Italian RMBS had remained rather stable in the six months ending in May.

* S&P said that the impact of the revised rating criteria for Dutch RMBS was limited, noting that it had lowered ratings on 29 tranches of the 244 tranches it rates, while 59 tranches were upgraded. Finally, 156 tranches were unaffected.