Covered Bond & RMBS Comment – Rare Italian and new Finnish arriving

by: Joost Beaumont

  • EUR 107bn of euro benchmarks issued so far this year
  • This week seems last for issuers to come to the market
  • Cariparma is in market with second 8y benchmark of this year…
  • Guidance has been set at ms +20bps, fair value around ms -mid 10s
  • OMA Savings Bank in market with 5y sub-benchmark, guidance ms +5bps
  • Royal Bank of Canada raised GBP 650mn with 5y floater on Friday
  • German and French covered bonds outperformed last week

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Covered-Bond-RMBS-Comment-4-December.pdf (212 KB)

EUR 107bn of euro benchmark issued so far this year

Last week, one benchmark was issued, taking year-to-date supply of euro benchmarks to EUR 107bn. This compared to EUR 113bn of redemptions. This month, some EUR6bn of benchmark will still redeem, but we wonder whether we will see new supply matching this amount. This week seems the last week for issuers to come to the market, but the pace of new issuance has slowed already, suggesting that most issuers have already shifted into Christmas mode.

Cariparma in market with long 8y benchmark

Cariparma Credit Agricole, a subsidiary of Credit Agricole, has just announced that it will sell a EUR 750mn long 8y covered bond (rated Aaa, ECBC Label). This will be Cariparma’s third benchmark of this year, and the second with a 8y tenor. In March, it sold an EUR 750mn 8y benchmark at ms +53bps. This deal attracted a book size of EUR 1.8bn. What is more, the deal has performed strongly, as it is currently quoted at around ms +14bps. The bank has set guidance of the long 8y bond at ms +20bps area. We see fair value of the new benchmark at around ms +15bps. It is potentially an interesting deal to add exposure to the Italian market, given that issuance from the country has remained modest in recent years.

The cover pool fully consists of Italian residential mortgages, which have a WA current LTV of 55% and a WA seasoning of 4.7yrs. OC was some 18.8% at the end of September.

OMA Savings Bank selling debut sub-benchmark

Finnish OMA Savings Bank has set guidance for its debut EUR 250mn 5y covered bond (rated AAA) at ms +5bps. This compares to ms -7bps where the SPMTBK 0 ⅛ 10/24/22 is trading, while the current spread level would offer pickup of some 20bps versus the Finnish strongest issuers. Versus the sovereign, the pickup is now around 50bps.

The investor presentation shows that the cover pool includes Finnish residential mortgages, which have a WA indexed LTV of 47.3% and WA seasoning of 38months. Nominal OC was 60.1% at the end of November.

Royal Bank of Canada raised GBP 650mn 5y floater

Last week, there was a pickup in issuance of GBP-denominated covered bonds. On Friday, Royal Bank of Canada sold its second GBP covered bond, raising GBP 650mn with a 5y floating rate bond. The deal was priced at 3mL +23bps, which was well inside guidance and 1bp lower than where TSB Bank sold a 5y floater earlier last week. Demand was solid, as the book size was reported at GBP 840mn. Friday’s deal brought year-to-date supply of GBP-denominated covered bonds to GBP 11.1bn this year (2016: GBP 6bn). Supply has been supported by the upcoming end of the Bank of England’s cheap bank borrowing programmes.

Two-way flow in Dutch covered bonds

Spreads continued to tighten last week, with the iBoxx euro benchmark covered bond index reaching again a new post-crisis low. French and German covered bonds outperformed last week, despite the fact that they are already trading at very tight levels. On Friday, we saw good two-way flow in Dutch covered bonds, while there were buyers of Nordic paper at the very short-end of the curve. But liquidity has become thin.

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