In terms of issuance, covered bonds seem to have had a strong start to the year, but is the market warping all of a sudden?
We hear there was a rush of issues from French banks just last week, but suddenly this week they are missing. Reportedly.
In fact, this week’s covered issues have come exclusively from non-eurozone countries (mainly: Australia and Sweden). Yes, we know we shouldn’t jump to conclusions on two-week trends, but could the absence of the French possibly have anything to do with that supposedly irrelevant S&P downgrade?
Here’s a little graph on issuance (as of Tuesday evening), courtesy of Dealogic:
Actually, only a small number of top quality borrowers have managed to tap the market so far this month and record new issue spreads have fed through to significant price falls in the secondary market. In Europe, the north-south divide clearly clearly remains.
According to Dealogic figures, year-to-date covered bond issuances by banks run to €29.8bn equivalent worldwide. This compares to a total of €52.2bn euros registered in January 2011 and €33.3bn in January 2010. “There was a similar strong start of the year in 2011 so we are less surprised this time,” says Hélène Heberlein, head of covered bonds at Fitch Ratings in Paris.
So, what’s next for covered bonds? Fitch has actually just released an investor survey on the matter, which includes one particular nugget:
- 83 per cent of respondents said they were not tied by ‘triple A’ constraints. The rating agency says “their rating limits for non-’AAA’ covered bonds were evenly split between ‘AA’, ‘A’, ‘BBB’, and no limit at all.”
So, if French banks were rushing to the covered trough last week, they really needn’t…
Anyway, most analysts expect a lull in 2012 after record issuance volumes last year. For one thing, expected redemptions are down 9.7 per cent to 169.6 bn euros equivalent according to Dealogic.
Bank of America Merrill Lynch has a forecast of between €120 and €195bn for EMEA jumbo issuances, compared with a total 185 bn euros were raised last year. “The volume of funding sourced through retail deposits combined with declines in lending and active leveraging have reduced the need for absolute volumes of new funding in 2012 for a number of institutions,” said Julia Hoggett, managing director at the bank.