Covered Bond & RMBS Comment – Large redemptions to support primary and secondary markets

by: Joost Beaumont

  • Last week’s deals show that the door to the primary market is still open
  • But activity to remain muted due to black-out periods and holidays
  • Peripheral covered bonds outperformed last week…
  • …while net supply is likely to continue downward pressure on spreads
  • French RMBS transaction SapphireOne Mortgages 2016-1 upsized…
  • …but credit enhancement a bit higher than it was initially

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Covered-Bond-RMBS-Comment-25-July.pdf (241 KB)

Door to primary market still open

Last week showed that the primary covered bond market is still open for business and this is likely to remain the case this week. Two non-CBPP3 eligible euro benchmark covered bonds from were launched last week, while two German issuers tapped the market. In total, all four raised more than EUR 3bn. Therefore, we could see some more deals or taps this week, although activity is likely to remain muted, as a large number of banks is still in their black-out period, while the summer holidays could also limit activity. Having said that, a relatively large amount of redemptions is providing a favourable backdrop for new issuance.

Periphery outperforming

Risk-on sentiment dominated on financial markets last week. As a results, spreads of covered bonds continued to tighten, according to the iBoxx figures. Peripheral covered bonds did best last week, and Spain in particular. Net supply is currently probably also a factor at play, as around EUR 15bn of euro benchmark covered bonds redeem this month, while gross supply (including taps) is just below EUR 5bn. This week, some EUR 6.5bn of benchmarks will redeem, which should continue to push downward pressure on spreads.

French RMBS SapphireOne Mortgages 2016-1 upsized

GE Money Bank upsized the deal size of SapphireOne Mortgages 2016-1, the first publicly sold French RMBS transaction in about a year. Initially, the deal size was set at EUR 750mn, but in the end EUR 850mn was printed. EUR 702.9mn of the class A notes (AAA/AAA, WAL 2.25yrs, CE 19.8%, ABSPP eligible) were sold at 3mE +50bps, which was in line with guidance. Furthermore, the size of the class B notes (AA/AA, 3.08yrs, CE 15.7%) was EUR 34.8mn, while the spread was 3mE +120bps. The class C tranche (A/A, 3.08yrs, CE 12.86%) amounted to EUR 24.2mn at a spread of 3mE +210bps. Finally, EUR 19.1mn of the class D notes (BBB/BBB, 3.08yrs, CE 10.62%) were sold at 3mE +325bps.

Earlier it seemed that the deal attracted only modest demand, but still the issuer was able to increase the deal size in the end, suggesting that investors were happy to buy this deal. However, the credit enhancements of the tranches were a bit higher than at the start, while the final spread of the class D and E notes were a bit higher than at guidance.

Other news:

* S&P affirmed the AAA rating of the covered bonds issued by ING Bank. The rating buffer is three notches.