Covered Bond & RMBS Comment – First non-EU conditional pass-through to arrive

by: Joost Beaumont , Lea Riives

  • Leeds Building Society attracted solid demand for 7y benchmark…
  • This, together with NWIDE last week, showed appetite for UK remains good
  • Today, Bank of Queensland will test the water with first non-EU CPT deal
  • It will also be the first deal after Moody’s cut the ratings of four main banks
  • Overall, we see fair value at around ms + mid 10s
  • The pipeline is shrinking in run-up to summer break
  • Australian and Canadian paper in demand in secondary market

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-27-June.pdf (222 KB)

Leeds Building Society drew healthy demand for 5y benchmark

Leeds Building Society came to the market with a 7y covered bond benchmark yesterday, with final pricing at ms +17bps. Investor demand was healthy, as the book was 1.3 times covered. This allowed the issuer to leave only a small new issue premium on the table, which is in line with current practice for some time now. 

This was the 6th UK covered bond that was issued this year. Its best comparable was the COVBS 0 ½ 01/12/24, which was issued at ms +18bps (also providing a new issue premium of 2bps) in January. Yesterday’s deal therefore showed that new conditions for UK covered bonds have remained rather steady during the year so far, despite the looming Brexit.

 Long awaited first Australian conditional pass-through benchmark to arrive

Today, Bank of Queensland will come to the market with an EUR 500mn (no grow) 5y conditional pass-through (CPT) covered bond (rated Aaa/AAA by Moody’s/Fitch). The deal follows a roadshow and will constitute the first non-European CPT covered bond benchmark ever launched. This makes the estimation of fair value more cumbersome. Looking at the Australian curve, most 5y deals are trading at around ms flat, but we see fair value of the new Bank of Queensland at around ms +mid 10s, given that the spread between Dutch CPT versus Dutch soft bullet benchmarks is around 14bps.

The cover pool includes Australian residential mortgages, which have a WA current LTV of 61% and WA seasoning of 63 months. Furthermore, 84% are variable-rate mortgages, 16% are interest-only mortgages, while 64% are owner occupied (and 36% are investment mortgages).

Finally, it is interesting to note that this is the first Australian covered bond issuance after Moody’s last week cut the long term rating of major Australian banks from Aa3 to Aa2 motivated by concern about the national housing market. Therefore, it is interesting to see investor appetite for today’s deal.

 Nationwide Building Society sold 38% to pension funds and insurers

Last week, Nationwide Building Society lengthened its curve by issuing the NWIDE 1 ⅜ 06/29/32. The deal was well-received by investors as the book was 3 times covered. Half of the issue was allocated to Germany, while France took up 18%, UK 15%, Benelux 8% and 8% went to other European countries. The breakdown by investor type showed that 38% was allocated to pension funds/insurers, 26% to banks, 24% to fund managers, while central banks/official institutions received 12% of the issue. The large share of pension funds/insurers reflects the 15y tenor of the deal, which fits these investors well.

 Pipeline is shrinking

The pipeline is getting emptier, but we are still waiting for Bayerische Landesbank (in the UK Market), while Kommunalkredit Austria still needs to start its roadshow for a social public sector Pfandbrief.

Non-CBPP3 paper in demand

Spreads were stable overall in the secondary market. We saw some good demand for paper from Canada and Australia, probably as the spread pick-up versus the (semi) core has become attractive again. We also saw buyers of French names in the 5y tenor, while the short- end Germany was also in demand.

Other news

*S&P affirmed A rating of the mortgage covered bond program of UniCredit SpA.


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