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Covered bonds: There’s no place like home

In the new world of covered bonds, it really does matter where you come from.

Issuance activity in the covered bond market has stabilized in the second quarter of this year, after having been confined to sporadic windows since the financial crisis hit the sector in late 2007. As the dust clears, it is a very different market from before the credit crunch. There has been increasing demarcation between issues that vary in collateral type, maturity and the issuer’s credit strength.

The disparity between mortgage-backed deals and public sector deals was illustrated towards the end of July when Depfa Deutsche Pfandbriefbank received €4.5 billion in orders for its €2 billion, two-year deal that priced at just one basis point over mid-swaps. Concurrently, Portugal’s Banco BPI launched its debut covered bond with much less success. The order book only just scraped past the issue’s €1 billion size, and the deal priced nearly 50 basis points wider than the Depfa deal. "This is a pretty significant phase we’re in right now," says Derry Hubbard, head of covered bonds at BNP Paribas. "Differentiation is the name of the game."

German investors have become much more important for Pfandbrief placements

Placement shares with domestic investors

Source: Dresdner Kleinwort Syndicate, IFR, EuroWeek, Dresdner Kleinwort Research

But the difference between the two cannot be attributed wholly to the dichotomy between mortgage issues and public sector ones.