Covered Bond & RMBS Comment – Another smooth debut of sub-benchmark

by: Joost Beaumont

  • Santander Consumer Finance raised EUR 250mn with 7y debut deal
  • The spread was set 1bp tighter than that of Wuestenrot Bausparkasse
  • Benchmark issuer on sidelines, probably focusing on other asset classes
  • Stadshypothek just set guidance for 7y deal at ms -6bps
  • CBPP3 purchases increased last week on back of primary market
  • Eurosystem on track to buy around EUR 3-4bn on a net basis this month
  • Limited impact from housing measures taken by new Dutch government
  • We expect Dutch house prices to increase by 7.5% this year

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.

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Santander Consumer Bank sold EUR 250mn 7y mortgage Pfandbrief

Santander Consumer Bank smoothly sold an EUR 250mn 7y mortgage Pfandbrief yesterday. The debut deal of the issuer attracted EUR 380mn of demand and was priced 1bp tighter than last week’s sub-benchmark of Wuestenrot Bausparkasse (although this bank upsized its bond to EUR 300mn). Overall, the deal offered a pickup of some 8bps versus German benchmark Pfandbriefe with a similar maturity.

Issuers on sidelines

It was also the first euro-denominated deal of this week. Overall, it seems that issuers are not in a hurry to come to the market before year-end, suggesting that some quiet weeks lie ahead of us. Having said that, there is still a lot of activity in primary markets of other fixed income asset classes, which suggests that the focus of banks has currently turned away from covered bonds, despite the fact that new issue conditions are also still very good.

Stadshypothek in market with 7y benchmark, its third of this year

Stadshypothek has just set guidance for a 7y euro benchmark (rated Aaa, ECBC Label) deal at ms -6bps. It will be the issuer’s third euro benchmark of this year. In October, it sold a 10y deal at ms -5bps, which is now trading at ms -7bps. Furthermore, it issued a 7y deal at ms -1bps already in February (the SHBASS 0 ⅜ 02/21/24). This bond is now quoted at around ms -11bps. Overall, we see fair value of the new 7y deal at around ms -10bps.

The cover pool consists of Swedish residential mortgages, which have a WA indexed LTV of 51.5%. Nominal OC was 10% at the end of September.

Investors looking for ultra-long end Dutch paper

It looks like investors were already in Christmas mode yesterday, as there was again limited activity in the secondary market. Nevertheless, we saw buyers of Dutch covered bonds at the very long end of the curve. Meanwhile, Nordic names were also in demand again, albeit mostly from the street. Overall, spreads held up well.

 CBPP3 supported by primary market

The weekly figures on CBPP3 showed that the central bank purchased EUR 1.4bn of covered bonds on a net as well as a gross basis last week (there were no reinvestments). This was almost EUR 1bn more than the amount of purchases in the week before last. However, the increase fully stemmed from a pickup in settlements in the primary market.

We estimate that the Eurosystem bought around EUR 1bn in the primary market last week, translating in daily average purchases of only EUR 87mn in the secondary market. This was the lowest amount in five weeks. Still, the central bank has already bought more than EUR 3bn on a net basis so far this month, which is within our range of EUR 3-4bn that we expect the central bank to continue to buy on a net basis in coming months.

Limited impact of new Dutch government’s housing market reforms

Yesterday, our housing market specialist published a report on the impact of the measures taken by the new Dutch government regarding the housing market. Overall, the view is that the impact of some tightening measures will be compensated for by some easing measures with the overall impact on house prices remaining limited.

One other key factor is that the economic circumstances are now much better compared to the last time housing market reforms were implemented. As a result, we maintain our price forecasts of a 7.5% increase in home prices this year and a 5% rise in 2018. Having said that, the housing market is becoming more sensitive to interest rate increases due to the reduction of mortgage relief. However, in the short term we do not foresee a strong rise in interest rates, given the recent announcement by the European Central Bank that it will continue its QE program in 2018, albeit at a slower pace.

As regards home sales, our specialist continues to expect a modest decline of 5% next year, after an increase of 15% this year. The change in trend is mainly attributable to the shortage in supply. The number of homes for sale has steadily declined as transactions have increased. As a result, buyers find it increasingly difficult to find a suitable home.

Other news

* Fitch affirmed the AA+ rating of BNP Paribas Public Sector SCF programme. There is no rating buffer.

 

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