The hit to liquidity suffered by the covered bond market in September threw the market into disarray. The only prevailing opinion seems to be that no one knows what’s going on, or what the eventual cost to the market will be.
Different sectors of the covered bond market are reacting in different ways but as issuers at last began to contribute to the trickle of issuance following the traditional late-summer break, the self-proclaimed market leader has proved to be anything but.
While Pfandbrief market participants have been busy assuring everyone that the 200-year old product is an island of calm in the tumultuous seas of today’s financial markets, the sheer lack of issuance has given the lie to this claim. As any covered bond banker will explain, bold issuance is needed to resettle the covered bond market, and the core markets, such as the Pfandbrief, need to stabilize before the new markets can reopen.
But Pfandbrief issuers have so far refused to take on that role, leaving the younger markets, inexperienced in weaker credit environments, to fill the void.
In the UK, HBOS was ready to price its €2 billion, three-year UK covered bond deal at around five basis points over mid-swaps, before having its thunder stolen by Nationwide announcing price guidance of 11bp to 12bp over mid swaps for its own benchmark €1 billion issue. As a result, market bids for the HBOS issue, hoped to be around 4bp over mid swaps, actually came in at around 8bp over. Nationwide then revised guidance on its own issue to 15bp over mid swaps. Market participants attribute this confusion to the fact that there are a lot of young people in covered bonds who know only bull markets.
The market is showing signs of settling, though. Bradford and Bingley has issued a five-year, £500 million covered bond via ABN Amro, and Norway’s SpareBank 1 has announced its inaugural obligasjoner med fortinnstrett issue, a €1.5 billion three-year deal issued via Merrill Lynch, HSBC, Dresdner and Danske. The Sparebank deal was oversubscribed to the tune of more than €3 billion. It was the sort of deal that the market had been waiting for, and goes some way to restoring confidence in the sector.
Conversely, Pfandbrief issuers have remained relatively quiet. Münchener Hypothekenbank recently issued a €150 million public-sector Pfandbrief, while earlier, Hypothekenbank Essen tapped its €2.4 billion 2009 Pfandbrief for €125 million. But the benchmark jumbo issue that many have been waiting for to bring stability to the market has not materialized.
The Pfandbrief market’s refusal to pay a premium for issuance could well prove damaging at a time when it has been voicing concerns that the emergence of non-legislated, structured covered bonds could be diminishing the view of infallibility of covered bonds among investors. Pfandbrief issuers have remained bullish about their product, saying that banks still need funding, and the market still needs Pfandbriefe. But other, younger sectors have reopened the covered bond market. It’s time for the Pfandbrief market to put up or shut up.
It depends what you mean by covered bond
Euromoney September 2007
Net jumbo Pfandbrief issuance is likely be down again this year for the third year running, while structured covered bond issuance grows apace. This is generating some bitter debate about just how much investors understand the difference between the two types of debt.
