Covered Bond & RMBS Comment – Sterling supply surge

by: Joost Beaumont

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Covered-Bond-RMBS-Comment-1-December.pdf (63 KB)
  • TSB Bank drew strong demand for GBP 500mn floating rate covered bond
  • Royal Bank of Canada follows, as it is also selling a GBP 5y floater
  • New issuance of GBP-denominated covered bonds now around GBP 10bn
  • This is the highest level since 2012
  • New supply of euro benchmark deals has remained subdued recently
  • Issuance likely to remain limited in run up to year-end
  • Strong demand at short end of the curve, but hardly any supply


TSB Bank drew strong demand for debut GBP floater

TSB Bank was the only issuer active in the covered bond market. It sold its inaugural 5y GBP 500mn floating rate covered bond benchmark. The issuer set the spread at 3mL +24bps, which was well inside guidance of 3mL +30bps, while it was 1bps above the level where Santander UK sold similar deal recently. Demand was strong, as the deal was roughly three times covered.

Royal Bank of Canada next to issue 5y GBP benchmark

The GBP-denominated market seems hot, as Royal Bank of Canada has just announced that it will also sell a 5y GBP floating rate covered bond soon. The deal will be rated Aaa/AAA/AAA by Moody’s/Fitch/DBRS. The issuer has set guidance at 3mL +27bps. It will be the 6th GBP deal of a Canadian issuer this year, and the issuer’s second. At the start of the year, it already sold a GBP 500mn 5y deal at UKT +63bps.

Almost GBP10bn raised so far this year, highest since 2012

The sterling market has seen almost GBP 10bn of supply this year, which is a strong increase compared to the GBP 6bn that was issued last year. Meanwhile, it is the highest level since 2012. The increase mainly stems from UK issuers, which might be related to the upcoming end of cheap borrowing programmes of the Bank of England as well as increased funding needs. German issuers have also raised their GBP-denominated covered bond funding.

Subdued activity primary market for euro benchmarks

Activity in the euro benchmark market remained subdued this week, with actually only one benchmark deal seeing the light of day. As mentioned yesterday, total supply of euro benchmarks now stand at EUR 107bn, with net supply being around EUR 6bn negative. We think that the window to the primary market is still open, but it seems that issuers are already preparing for next year. As such, new supply is likely to remain limited in coming weeks, before issuance will pick up strongly at the start of next year.

Demand at short end, but no supply

Trading activity remained limited yesterday. We saw strong demand for paper at the very short end of the curve, but there is hardly any supply left. Meanwhile, it seems that investors are cleaning up the balance sheets, as order sizes have become very precise.


Other news

* Fitch affirmed the AAA rating of the covered bonds issued by Commonwealth Bank of Australia. The rating buffer is four notches.

* Fitch also affirmed the AAA rating of Realkredit Danmark’s covered bonds issued out of cover pool S, while the rating of those issued out of cover pool T were affirmed at AA+. The rating buffers are two and three notches, respectively.

* S&P affirmed the AAA rating of the covered bonds issued by Landshypotek Bank. The rating benefits from one notch unused uplift.