Covered Bond & RMBS Comment – Primary to kick off week with negative yield

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.

  • Berlin Hyp to issue EUR 500mn (no-grow) 4y mortgage Pfandbrief…
  • …which is likely to be issued at a negative yield
  • A comparable BHH mortgage Pfandbrief currently yields -0.22%
  • This would be the bank’s second deal with a negative yield at issuance
  • Eika Boligkreditt will launch a EUR 500mn (no-grow) 7y benchmark today
  • This will be the 9th deal from Norway this year and the issuer’s second
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Berlin Hyp to issue 4y mortgage Pfandbrief, most likely at a negative yield

Berlin Hyp (BHH) announced yesterday that it will kick off this week’s primary market of euro benchmark covered bond with a EUR 500mn (no-grow) 4y deal. This deal (rated Aaa) will be the issuer’s third benchmark deal of 2017 and will follow the 6y green benchmark that the bank sold at ms -14 in June (it has recently also tapped the BHH 0 ⅛ 01/05/24 sub-benchmark for EUR 250mn at ms -18bps).

Today, the bank will be active at the shorter-end of the curve, suggesting that the deal will be sold at a negative yield. If true, this would be the issuer’s second deal that will have a negative yield at issuance, as the BHH 0 03/15/19 was the first ever covered bond issued at a negative yield last year. Overall, we see fair value of the 4y bond at around ms -20bps, which is where the BHH 1 ¼ 04/23/21 is trading. This bond has a yield of-0.22%. Last year, investors did not seem to have significant impediments investing in negative yielding bonds at issuance, but it will be interesting to see current investor sentiment. Having said that, a comparable German government bond is yielding -0.63%.

The cover pool includes 78% commercial mortgages (of which 64% German, 13% Dutch and 10% French) and 22% residential mortgages (97% German). The mortgages have a WA LTV of 56% and a WA seasoning of 4.2 years. Meanwhile, nominal OC was 6.1% at the end of September.

Eika Boligkreditt to sell another Norwegian 7y deal

Today, Eika Boligkreditt will also be in the market, selling a EUR 500mn (no-grow) 7y deal (rated Aaa, ECBC Label). Norwegian issuers have been rather active this year, and this will be the 9th euro benchmark deal from a Norwegian issuer. It will be this year’s second euro benchmark covered bond of Eika Boligkreditt. Overall, the deal will bring the country’s total issuance to EUR 8bn so far this year.

Recent Norwegian deals all had a 7y tenor, with the last 7y deal being sold by DNB Boligkreditt at ms -9bps. However, the covered bonds of Eika Boligkreditt are trading wider. Indeed, a better comparable is the EIKBOL 0 ⅜ 02/16/24, which was issued at ms +2bps in February of this year and which is currently quoted at around ms -8bps. Overall, fair value of the new 7y is also at around this level in our view.

The cover pool fully consists of Norwegian residential mortgages, which have a WA indexed LTV of 43%. Actual OC was 8.8% at the end of September.

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* S&P assigned a AAA rating to the mortgage covered bond programme of Finnish OMA Savings Bank. The programme will benefit from two notches of unused uplifts.

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