Covered Bond & RMBS Comment – Summer heat

by: Joost Beaumont

  • A busy day ahead as CBA launched a 10y euro benchmark…
  • …while HSHN is the next German issuer to tap the market
  • WL Bank upsized its tap, reflecting strong demand
  • Eurosystem back in business last week
  • First French RMBS in the market, while new UK RMBS offers one tranche
  • Dutch existing home sales keep on rising

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

Covered-Bond-RMBS-Comment-20-July.pdf (303 KB)

WL Bank follows other German banks with tap

WL Bank was the fourth German bank that tapped a euro benchmark Pfandbrief in July. Just like Commerzbank on 12 July, the issuer decided to tap its 10y Pfandbrief (i.e. the WLBANK 0 ¾ 02/02/26). Initially, it had set the size of the tap at EUR 125mn, while the spread guidance was ms -8bps. In the end, however, the size was doubled to EUR 250mn, while the spread was set at ms -10bps. This implied no new issue premium, although the yield was positive. Demand for the tap was very strong, as the order book was around EUR 400mn. This again shows that investors have not all gone on holiday and that conditions to do new deals or taps are still favourable.

 HSH Nordbank next German tap

HSH Nordbank will be next in line to tap the market. It will tap its HSHN 0 ⅜ 04/27/23 (rated Aa3) for a minimum amount of EUR 250mn. The deal was originally launched in April at ms +23bps, and is now quoted at around ms +15/19bps. Guidance has been set at ms +20bps. The cover pool consists of 19% residential mortgages (mainly German) and 81% commercial mortgages (of which 79% German). The loans have a WA LTV of 55% and a WA seasoning of 4.8yrs. Nominal OC was 7.8% at the end of last year.

Commonwealth Bank of Australia to sell 10y benchmark

Commonwealth Bank of Australia (CBA) has just set the IPT for a 10y euro benchmark at ms +mid/high 20s. It will be the bank’s third euro benchmark, following a dual tranche deal in January. Then, it sold a 5y and a 15y bond, at ms +33bp and ms +50bps, respectively. These bonds are now trading at around ms +4bps and ms +25bps, suggesting that fair value of the new 10y is around the ms +mid 10s.

The cover pool consists of Australian residential mortgages, which have a WA indexed LTV of 46% and WA seasoning of 52 months. OC was 28% at the end of May.

Eurosystem looking for Irish and Finnish paper

Yesterday, it was again light trading day in the secondary market. We saw the Eurosystem looking for some short-dated Irish covered bonds as well as Finnish paper in the belly of the curve. There were also buyers of 10y German Pfandbriefe, probably on the back of the tap of WL Bank. Furthermore, we saw buyers of Dutch covered bonds, close to the belly of the curve. Spreads remained roughly stable overall.

CBPP3 – Eurosystem back in business

The Eurosystem stepped up its CBPP3 purchases last week, as it bought EUR 1.4bn in total. This was roughly double the amount bought in the week before last, taking the total size of CBPP3 to EUR 185.5bn. We estimate that it purchased on average EUR 220mn a day in the secondary market, which was roughly in line with this year’s average. As such, it seems that the central bank is not yet facing any difficulties in finding covered bonds that it wants to buy (in contrast to what last week’s figures were suggesting). This is probably related to the taps that we saw last week, which might have increased activity in the secondary market. Halfway through July, the central bank has bought around EUR 2.5bn so far, leaving it in track to buy around EUR 5-6bn this month, which would be in line with the amounts bought in May and June.

First French RMBS in the market

GE Money Bank in France has set the IPTs for the four offered tranches of French RMBS SapphireOne 2016-1. This is the first French RMBS of this year, and the first public deal in almost a year. The IPT of the class A tranche (rated AAA/AAA, WAL of 2.27yrs, CE of 17.7%) has been set at 3mE +45-50bps, while that of the class B tranche (AA/AA, 3.08yrs, CE 13.6%) is 3mE +low 100bps, that of the class C tranche (A/A, 3.08yrs, CE 10.8%) 3mE +high 100bps, and the IPT of the class D notes (BBB/BBB, 3.08yrs, CE 8.5%) has been set at 3mE +high 200bps. Pricing is expected this week.

The pool of EUR 2.1bn consists of 38K loans, which have an indexed LTV of 50.5% and a debt-to income ratio of 31%. WA seasoning is 58 months. Currently, 94% of the mortgage loans are performing, while 2.1% is more than 3 months in arrears. Furthermore, the issuer has indicated that the Class A notes will be made to be ABSPP eligible, while the coupons of all notes are floored at 0%.

Clydesdale Bank to sell one tranche of new prime UK RMBS Lanark transaction

Clydesdale Bank announced yesterday that it will sell only one tranche of the Lanark Master Issuer Plc Series 2016-1 transaction. It will offer a AAA/Aaa rated tranche with a WAL of 2yrs and CE of 12%. The IPT has been set at 3mL +100bps. Concept ABS noted that GBP770mn of new mortgages would be added to the master trust. Currently, the pool consists of GBP 3.8bn of UK residential mortgages, which have a WA current indexed LTV of 55%, a WA seasoning of 54 months, and an average loan size of GBP101K.

Dutch housing transactions keep going up

Dutch existing home sales kept rising in June. Figures of the Land Registry showed that 17,862 homes were sold last month, which was an increase from 16,066 homes in May. It meant a 17.9% rise compared to the same period last year. A breakdown by region as well as type of home revealed that the increase (year on year) was broad-based. Historically low mortgage interest rates are boosting home sales, while improving economic conditions also help.