Covered Bond & RMBS Comment – All kinds of new issue flavours

by: Joost Beaumont

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.

  • Primary covered bond market flooded with new deals today
  • Aegon, Danske, and DBS Bank to launch their second deals of this year
  • So, all kinds of flavours available
  • Aegon and DBS to issue 7y deals, while Danske active in 10y tenor
  • Deutsche Hypothekenbank ready to issue first green covered bond
  • Achmea also almost completed its roadshow for return to market
  • Trading remained limited in secondary market
  • German Pfandbriefe ‘bid only’
Covered-Bond-RMBS-Comment-14-November.pdf (112 KB)

DBS Bank to launch its second 7y of the year

It remained silent in the primary market yesterday, but today the flow of new deals will continue. DBS Bank from Singapore will come to market with a 7y euro benchmark deal (rated Aaa/AAA), which will be its second 7y deal of this year. In January, the issuer already launched its debut euro benchmark (the DBSSP 0 ⅜ 01/23/24). This deal was priced at ms +15bps and currently trades at around ms -3bps.

The Singapore covered bond market is gradually growing and adds another flavour to the euro benchmark covered bond market, with highly-rated banks offering the dual recourse instrument. Today’s deal will extend DBS Bank’s curve by around a year, so adding a few bps for the curve extension results in a fair value of around ms flat. Such a level would compare favourably versus (semi) core paper, as it would offer a spread pickup in a range of 15bps to 20bps. Singapore is considered a non-OECD country which does restrict some mandates from investing in the deals offering at times an attractive pickup.

The cover pool consists of Singapore residential mortgages, which have a WA indexed LTV of 57%. Actual OC was 44.8% at the start of October, while committed IC is 17.6%.

Aegon Bank in market with EUR 500mn 7y deal

Aegon Bank has just announced that it will sell a EUR 500mn 7y benchmark today, being just ahead of an upcoming deal that has been announced Achmea Bank, something we discuss later. The Aegon deal will also have a conditional pass-through structure, carrying a AAA/AAA rating as well as the ECBC Label. It will be the bank’s second deal of this year, as it already sold a 10y deal in June. This deal (the AEGON 0 ¾ 06/27/27) was sold at ms +12bps and currently trades at around ms +2bps. Another of the bonds from the issuer, the AEGON 0 ¼ 05/25/23, trades at around ms -9bps. So it seems that fair value of the new 7y is around ms -mid-single digits. This would offer a 4bps pickup versus the recently issued 7y benchmark of NN Bank (which was issued at ms flat). Meanwhile, at ms -5bps, the spread pickup versus the Dutch sovereign will be more than 30bps.

The cover pool includes Dutch residential mortgages, which have a WA indexed LTV of 73% and WA seasoning of 3.8yrs. Nominal OC was 25.5% at the end of September. Please see for a comparison of Dutch cover pools, the link to the note about Achmea Bank.

Dankse Bank also in market with second deal of this year

It will be a busy day in the primary market, as Dankse Bank will also sell its second deal of this year (ABN AMRO involved). It has set guidance of an EUR 500mn 10y deal (rated AAA/AAA, ECBC Label) at ms -1bps. The curve of Danske Bank is rather flat, with the longest outstanding bond (the 23/6/22) trading at around ms -15bps. A BRF 0 ½ 10/01/26 deal is quoted at ms -3bps, but covered bonds of Danske Bank tend to trade at tighter levels.

The bond will be issued out of cover pool C, which includes 70% residential mortgages from Sweden and 30% from Norway. The mortgages have a WA LTV of 55.4% and WA seasoning of 1.8yrs. OC stood at 27.2% at the end of March.

Deutsche Hypo ready for issuance of first green covered bond

Deutsche Hypothekenbank announced yesterday that it had completed its roadshow for its debut EUR 500mn (no-grow) green covered bond (Aa1, ABN AMRO involved in the deal). The issuer noted that investors seem to prefer a deal with a 5y to 7y maturity, while the deal is expected on Wednesday or Thursday.

The issuer will become the second German bank that has setup a green covered bond programme, following Berlin Hyp that sold its first green Pfandbrief in 2015. Deutsche Hypo will use the proceeds of the covered bond to finance green buildings, which means that these buildings’ energy use remains within pre-set limits or have a minimum level of green building certificates. Meanwhile, the buildings will only be used in sustainable way. The bank obtained a second party opinion from Oekom, which provide a sustainability rating of C+ to the company itself. The agency said that the overall assessment of the green framework was positive. However, it also mentioned that the selection criteria for eligible asset could be strengthened going forward.

Achmea Bank almost ready to return to the market

Yesterday, we published a note on the new covered bond programme of Achmea Bank, which is almost ready to launch its first deal from the new programme. The structure is rather similar to other Dutch CPT programmes (i.e. the maturity extension can only happen after an issuer event of default), except for the fact that the bank has no documented OC (implying that it will stick to the 5% minimum required by the Dutch covered bond law) and no minimum mortgage interest rate level for mortgages to be eligible for the cover pool. Furthermore, Achmea Bank has a balance sheet total of EUR 14bn, of which EUR 11bn mortgages. The mortgages in the cover pool have a relatively low average principal balance, while the WA indexed LTV of 73% is roughly in line with the average in Dutch cover pools. The issuer has already announced that the first deal will be a EUR 500mn (no-grow) 7y benchmark (Aaa/AAA, ECBC Label, ABN AMRO involved in the deal).

German Pfandbriefe ‘bid-only’

The week started at a very quiet note in the secondary market, with only limited trading flows. Investors were looking for German Pfandbriefe, but these are currently ‘bid-only’. Furthermore, we saws some sellers of Dutch names in the short-end, while there is ongoing buying interest in Nordic names

Other news

* Fitch affirmed the AAA ratings of the class A notes of Dutch RMBS transactions DMPL XI and DRMP II.

Other recent publications:

Covered Bond Watch – Achmea returns with conditional pass-through
Short Insight – The ECB’s QE reinvestments revisited
Green Bond Monthly – Financials lead green charge
Financials Watch – Foundations arise for a new bank funding mix
Covered Bond Watch – No tapering of covered bonds
Financials Watch – European bank issuance outlook for 2018