Covered Bond & RMBS Comment – The flavours of the week

by: Joost Beaumont

  • Rabobank in market with 7y and 15y debut dual tranche
  • Guidance for 7y at ms -7bps and 15y ms +14bps
  • We see fair value at ms –low 10s and ms +high single digits, respectively
  • Sparebanken Sor Boligkreditt launched 5y deal, guidance ms +3bps
  • Obvion sold second green RMBS at tightest post-crisis spread
  • Another big step towards harmonising EU covered bond frameworks…
  • …as benefits outweigh costs according to EC report

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-22-May.pdf (240 KB)

Issuance of euro benchmark covered bonds to pick up after slow week

Activity in the primary market for euro benchmark covered bonds slowed last week, as one EUR 500mn benchmark was issued, together with a sub-benchmark deal (EUR 250mn). This brought gross supply of euro benchmark deals to EUR 8bn so far this month, which already exceeds total issuance in May last year. Furthermore, the outlook is bright, as some issuers completed roadshows last week. It is therefore likely that we will see a rather busy week, also because it will be a short one due to some markets being closed on Thursday. What is more, investors might be able to choose from different flavours this week.

Sparebanken Sor to issue EUR 500mn 5y deal

Sparebanken Sor is expected to launch a EUR 500mn 5y deal today (rated Aaa), after it finished a roadshow last week. It will be the issuers second euro benchmark covered bond, as the bank issued its debut deal in March last year.

The PLUSSB 0 ¼ 03/22/21 was issued at ms +22bps and is currently trading at around ms flat. Adding a few basis points for the curve extension gives a fair value estimate of ms + low single digits, which would make it the cheapest Norwegian covered bond in the 5y tenor. Indeed, DNBNO and SPABOL both issued 5y deal at ms flat earlier this year, but these bonds are now trading at around ms -8bps. Overall, Sparebanken Sor Boligkreditt tends to trade the widest of all Norwegian banks. Guidance has just been set at ms +3bps.

The investor presentation shows that the cover pool consists of Norwegian residential mortgage, which have a WA indexed LTV of 54% and WA seasoning of 39 months. OC was 14.2% at the end of March. 43% of the mortgages are exposed to homes in the Vest-Agder region, where price developments have been more modest according to the issuer.

Rabobank in market with 7y/15y dual tranche

Rabobank has just launched its debut dual tranche. It marks the entrance of the 7th Dutch issuer to the market, and it will be a sizable one. The bank is in the market with a 7y/15y dual tranche, following WSTP and Caffil earlier this month. Please read a detailed not on Rabobank’s covered bond programme here.

The bank has just set guidance for the 7y tranche at ms -7bps, while that of the 15y tranche has been set at ms +14bps. Best comparable for the 7y is the ABNANV 2 ⅜ 01/23/24, which is now quoted at around ms -13bps. Comparables for the 15y tranche are the ABNANV 1 ⅛ 01/12/32, which is trading at around ms +8bps, as well as the DEVOBA 0 ¾ 10/24/31 (trading at ms +13bps). So, fair value of the 7y deal is around ms –low 10s, while that for the 15y tranche is in the ms +high single digits.

Meanwhile, Banco Comercial Portugues will probably come to the market as well this week, as it completed a roadshow for a benchmark deal in the belly of the curve. Banks that are scheduled to hit the road are Berlin Hyp, which will start marketing its second green covered bond next week. More Boligkreditt will hit the road this week to meet investors about an inaugural deal.

Obvion sold senior tranche of Green Storm 2017 at 3mE +17bps

On Friday, Obvion priced its second Dutch green RMBS Green Storm 2017. The final spread of the senior tranche (rated AAA/Aaa/AAA, WAL 4.9yrs, CE 7.5%) was set at 3mE +17bps, which was well inside the IPT of +20bps. This was the tightest spread of a Dutch RMBS since the outbreak of the financial crisis, merely reflecting scarcity as well as the ABSPP. The final spread was also well below the 3mE +24bps where the senior tranche of the Storm 2017-1 was priced in January. In the end, the issuer printed EUR 550mn, despite the fact that demand was very strong. Indeed, the book size was reported at around EUR 1.3bn..

Spreads stable to slightly wider last week

Spreads were stable to slightly wider last week, according to the iBoxx euro benchmark covered bond index. Best performing were Belgian, Spanish, and German paper, while Dutch, Swiss, Portuguese and Nordic paper was underperforming. In terms of trading activity, we saw buyers of the periphery and Nordic names on Friday. Dutch paper was in demand in the short-end of the curve.

Another step towards harmonisation

The European Commission (EC) published its report called ‘Covered Bonds in the European Union: Harmonisation of legal frameworks and market behaviours’ on Friday. This report includes the findings of the consultancy firm that the EC had hired to assess the cost and benefits of introducing a dedicated EU legal framework for covered bonds. In the end, the conclusion is that the benefits of such a framework will outweigh the costs, as it will strengthen covered bond frameworks, further reducing risks.

The report provides an overview of the current state of the covered bond market, acknowledging that the market is substantial and functioning well. As such, changes should be implemented with care, preventing any market disruption. Furthermore, the report embraces the three-step approach towards harmonisation, which was proposed by the European Banking Authority in December (see a detailed note here). This would imply that the UCITs directive as well as the CRR will need to be updated, addressing all the key areas of covered bonds, such as:

  • issuance models used
  • composition of cover pools
  • LTV limits
  • OC levels
  • Scope and frequency of reporting
  • Supervision

The case for action were mainly that the market seems functioning well, but that it is still vulnerable if market conditions change. As such, harmonisation could strengthen the market, lowering risks. Furthermore, like the EBA, the report states that there are still some weaknesses in covered bond frameworks. This could be addressed via an EU Directive. Having said that, it is expected that the changes could be implemented smoothly, within existing frameworks/covered bond programmes.

Interesting to mention is that the EC agrees with the EBA on additional requirements for soft bullet and conditional pass-through covered bonds. In particular, the EC calls upon the industry to establish a more standard structure for CPT covered bonds in order to keep the preferential risk weight treatment. It seems that the Dutch structure would be a good example.

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