Covered Bond & RMBS Comment – A new 10y from Spain

by: Joost Beaumont

  • Banco de Sabadell in market with 10y euro benchmark covered bond
  • This is the second Spanish deal of this year
  • Guidance of ms +40bps looks generous versus our fair value estimate
  • UK covered bonds held up well after election announcement
  • Pace of growth Dutch housing transactions lessening

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-19-April.pdf (213 KB)

Banco De Sabadell to issue 10y benchmark

Banco De Sabadell (SABSM) will end the two-week inactivity in the primary covered bond market, as it will come to the market with a 10y euro benchmark deal (rated Aa2/AA, ECBC Label) today. Furthermore, it will only be the second Spanish deal of this year. Spanish banks have borrowed relatively large amounts in the TLTRO-II operations, while ongoing deleveraging has also lowered bank funding needs (see also our Financials Watch – Spanish banks tussle with domestic deleverage). More generally, the Spanish covered bond market has shrunk by the most in the past few years. This is likely to support demand for today’s deal.

Fair value at around ms +mid-high 20s

SABSM follows in the footsteps of Caixabank, which issued a 10y deal at the start of the year. This bond was sold at ms +60bps and is currently quoted at around ms +22bps. The new deal will extend the issuer’s curve by some 3 years, as the longest dated bond is the SABSM 0 ⅝ 06/10/24. This bond is now quoted at around ms +14bps. Looking at the issuer’s curve as well as the spread differential between SABSM and Caixabank, it seems that fair value of the new deal is at around ms +mid-high 20s. This would be more than 70bps inside the Spanish sovereign. Guidance has just been set at ms +40bps, which looks generous.

Strong secondary market

The secondary market felt rather strong yesterday, with spreads tighter across the curve an jurisdictions. Peripheral covered bonds remain well bid, although flow was light. We did not see any move of UK covered bonds following the announcement of new elections on 8 June. As such, covered bonds once again showed their resilience.

Pace of growth of Dutch home sales lessening

The Dutch Association of real estate brokers (NVM) published its Q1 figures of the housing market yesterday. These show that the number of housing transaction is still increasing, but that the pace of growth is slowing. This is mainly due to a decline in the stock of homes for sale. In Q1, existing home sales rose by 10% on an annual basis, while house prices increased by 8.8%. Regional differences remain large, although it seems that the differences have diminished.

Meanwhile, the shortage of supply is likely to become one of the main bottlenecks. Indeed, the stock of homes for sale has declined by 33% compared to a year ago. This has also reduced the time that it takes to sell a home. Overall, the Dutch housing has increasingly turned into a ‘sellers’ market. This was also underlined by the ask price, which increased by more than 5% in Q1 (versus a year ago), having risen for two years in a row now. Moreover, around two-thirds of homes that are put up for sale have been sold within 90 days.

Other news

* Moody’s has downgraded the issuer rating of NordLB to Baa2 from Baa1, reflecting weaker than expected financial results. The rating action is unlikely to hit the bank’s covered bond ratings, as there is sufficient TPI Leeway.



Other recent publications:

Eurozone Watch – French election Q&A

Financials Watch – Ireland: The Celtic tiger awakens

Housing Market Monitor – Next government’s plans still guesswork

Insurance Watch – The new UFR and its implications

Euro Corporate Watch – Life after QE: Fair values for sectors