Covered Bond & RMBS Comment – Eurosystem gets tougher on CPT structures

by: Joost Beaumont

  • CBPP3 to become stricter on purchases of CPT covered bonds
  • Only CPT covered bonds from investment grade issuers will be eligible
  • This excludes the Greek, Portuguese and Italian CPTs…
  • …but will not affect Dutch CPT covered bonds
  • Santander Consumer Finance in market with 7y EUR sub-benchmark
  • Deutsche Pfandbriefbank raised GBP 450mn with 3y mortgage Pfandbrief
  • Investors looking for 10y French paper
  • Number of Dutch households still in negative equity declined further

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-28-November.pdf (214 KB)

Issuer rating to determine CBPP3 eligibility of conditional pass-through covered bonds

The ECB decided to change the CBPP3 eligibility rules for conditional pass-through (CPT) covered bonds last week. From 1 February onward, it will only allow CPT covered bonds from issuers that have a first-best issuer rating of at least investment grade (or BBB-). This reflects the central bank’s view that CPT expose the Eurosystem to potentially higher risks. Interesting to note is that the ECB did not decide to discriminate between the type of CPT structure, particularly in regard to the maturity extension being possible pre-or-post issuer event of default.

However, it merely seems to reflect that the ECB does not favour to buy CPT covered bonds from issuers that mainly benefit from the higher ratings that CPT structures offer, when compared to soft bullet or hard bullet structures. Indeed, the decision will now only affect CPT covered bonds issued by Greek, Portuguese and Italian banks. Dutch CPT covered bonds all remain CBPP3 eligible, as all Dutch issuer ratings are investment grade. In the Netherlands, the issuer ratings of NIBC Bank and Van Lanschot fall in the triple B bucket, while those of Aegon Bank, NN Bank and Achmea Bank are all in the single A bucket.

Santander Consumer Bank in market with EUR sub-benchmark today

Santander Consumer Bank, a German subsidiary of the Spanish champion, will sell an inaugural EUR 250mn mortgage Pfandbrief today. The deal will have a 7y maturity and will be rated AAA by Fitch. Last week, Wuestenrot Bausparkasse sold a long 7y sub-benchmark at ms -10bps, while benchmark 7y Pfandbriefe are trading in the ms –high 10s area. Guidance has just been set at ms -9bps.

The cover pool will only include German residential mortgages, which have a WA LTV of 51% and WA seasoning of 4.1yrs.

 Activity in GBP-denominated covered bond market

The primary covered bond market started the week with Deutsche Pfandbriefbank issuing a GBP 450mn 3y mortgage Pfandbrief (rated Aa1). The bank printed GBP 450mn at UKT +63bps, which was below guidance of UKT +65bp. Demand  was solid, as the book size was GBP 675mn. Aareal Bank was the last German issuer that sold a GBP covered bond. At the end of September, it sold a GBP250mn 3y deal (the AARB 1 06/04/20, rated Aaa/AAA) at UKT +62bps.

The GBP market is likely to welcome another deal soon, given that TSB Bank will hit the road today to meet investors for an inaugural 5y GBP benchmark floating rate covered bond.

Investors looking for French paper at long-end

The secondary market made a slow start to the week. We saw most action in the periphery and semi core. The Eurosystem was buying 5y to 10y Spanish names, while other investors were looking for 10y CFF as well as Caffil paper. This probably reflects that most French 10y covered bonds are still trading at an interesting pickup versus the sovereign. In the non-CBPP3 eligible space spreads were roughly stable although there were some selling axes from the street.

Number of Dutch households that are in negative equity continues to decline

Figures reported by Calcasa showed that Dutch house prices as well as transactions continued to grow solidly in Q3. House prices rose by 7.8% on an annual basis, while transactions increased by 14.6% in Q3. This is in line with the picture painted by the official data. Calcase also provides an affordability index, which now shows that the share of net income that is spend on a home (on a net basis as well) was 14.6%, which compares to 27% at the peak in 2008. Meanwhile, the report indicates that the number of home owners that would be faced with a loss when selling their home dropped to 213K in Q3, down from 340K at the start of the year. Looking forward, housing prices will remain supported by a shortage of the supply of homes for sale as well as improved affordability and less households in negative equity. This will induce more existing home owners to look for a new home.

 Other news

* Moody’s upgraded several tranches in Dutch RMBS transactions. It upgraded the rating of class A notes of Candide Financing 2007 NHG to AAA from aa1, while the rating of the class C notes of Green Lion I were upgraded to Aa1 from Aa2. Furthermore, the class D and E notes of Orange Lion 2013-10 were upgraded to Aa3 (was A2) and A3 (was Baa2), respectively. The upgrades follow a better than expected performance of the collateral.

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