Covered Bond & RMBS Comment – Tight, tighter, tightest

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.

  • Flood of new issues yesterday, all printing at record tight levels
  • Demand for all deals still robust, while new issue premiums were minimal
  • So, new issue conditions are still excellent
  • Sparkasse Hannover to sell 10y sub-benchmark mortgage Pfandbrief today
  • Santander Consumer Bank will hit the road for 7y or 10y sub-benchmark
  • CBPP3 slightly stepped up secondary market purchases
  • Dutch economy continued to grow at solid pace – outlook bright
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Three new euro benchmark covered bond deals all priced at record tight levels

There was a flood of new issuance yesterday, with all kinds of flavours available for investors. But overall, all three deals showed that conditions in the primary market are still excellent. All deals priced at a record tight level one way or the other. Dankse Bank printed its 10y deal at the tightest level ever seen for a Danish euro benchmark deal according to our data. Meanwhile, Aegon Bank set a record tight level for a Dutch conditional pass-through benchmark (and printed the deal some 6bps below the level where NN Bank sold its first deal early October). Finally, DBS Bank managed to sell its 7y covered bond at ms -1bps, which was the first time that a euro benchmark deal from Singapore was sold with a negative spread versus mid swap. Happily, all deals were providing a positive yield.

Demand was strongest for the 7y Aegon deal, which most likely also reflects the likely participation of the Eurosytem’s. The fact that some investors cannot buy Singaporean covered bond because it is a non-OECD country might have dampened demand for that deal. Still, the bid-to-cover ratios were all robust while the issuers hardly paid any new issue premium. This bodes well for deals that are currently in the pipeline, like Deutsche Hypothekenbank as well as Achmea Bank.

Sparkasse Hannover to issue 10y sub-benchmark mortgage Pfandbrief

Today, Sparkasse Hannover (SSPHAN) will launch its debut sub-benchmark mortgage Pfandbrief, which will carry a AAA rating at Fitch. The issuer has already an outstanding sub-benchmark public sector deal with a 7y maturity (the SSPHAN 0 ⅞ 12/03/24). The latest 10y mortgage Pfandbrief (the DAA 0 ¾ 10/05/27) was issued by Deutsche Apotheker-und Aerztebank at ms-13bps and is now quoted at around ms -16bps.

The cover pool consist of 78% German residential mortgages and 22% commercial mortgages. The WA LTV is 56% and the WA seasoning is 4.3yrs. Nominal OC was 156% at the end of September.

Santander Consumer Bank will hit the road for 7y or 10y sub-benchmark

Santander Consumer Bank, a German subsidiary of the Spanish champion, will hit the road to market an inaugural sub-benchmark mortgage Pfandbrief, which will have a 7y or 10y maturity and will be assigned a AAA rating at Fitch. The roadshow will start on 21 November. The cover pool will only include German residential mortgages, which have a WA LTV of 51% and WA seasoning of 4.1yrs.

CBPP3 slightly stepped up secondary market purchases

The Eurosystem settled EUR 1bn of covered bond purchases on a gross basis last week, of which EUR 0.1bn were reinvestments. There were no settlements in the primary market, implying that the central bank bought slightly more than EUR 200mn covered bonds per day last week. This was higher than the average of EUR 150mn it bought on average per day since the end of the summer break. This could reflect some frontloading in the run up to year-end as well as the fact that there were no purchases in the primary market last week.

Dutch economy grew at solid pace in Q3

Yesterday, figures showed that the Dutch economy had grown by 0.4% in Q3 compared to the previous quarter. Although this was a significant slowdown compared to the 1.5% growth rate in Q2, it underlined that the Dutch economy is on a solid path of expansion. The details showed that most spending components rose further in the third quarter, but generally at a somewhat slower rate than in the second quarter. Inventories decreased however, which dampened growth. Another cause of the much lower figure is that import growth quickened somewhat, whereas export growth decelerated slightly.

Looking forward, our economists noted that the outlook remains bright. A rise in all confidence indicators suggests that growth is likely to pick up somewhat in Q4. Next year, the Dutch economy is expected to benefit from strengthening global economic conditions as well as an increase in public spending that was agreed by the new government.

Other news

* BBVA will retain EUR 1.8bn of Spanish RMBS BBVA RMBS 18 FT. The mortgages have a CLTV of 71% and seasoning of 7yrs.

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