Eurobonds: More Covered Bonds As Central Banks Due To Buy
July 06 2009 - 9:08AM
Dow Jones News
The covered bond market was centre stage again Monday, with two
new transactions announced, on the day that European central banks
were due to launch their EUR60 billion purchase program.
Germany's Deutsche Kreditbank is planning its inaugural deal - a
EUR500 million, five-year transaction - via joint lead managers
Barclays PLC, BayernLB, Commerzbank AG and DZ Bank.
And ABN Amro Bank NV of the Netherlands is planning to sell a
EUR2 billion five-year covered bond, via joint leads Deutsche Bank
AG, Natixis and Royal Bank of Scotland Group PLC.
Price guidance was set at 100-105 basis points and subsequently
tightened to 98 basis points over mid-swaps on the deal, which
marks a long-awaited return to the covered bond market for ABN,
following its takeover in 2007.
"It's definitely a welcome return for ABN to the benchmark
market," said one banker. "It's going exceptionally well. They have
been away for a long time, but the only reason was the [change of
ownership]."
ABN Amro is now owned by Royal Bank of Scotland Group PLC,
Spain's Banco Santander SA and the Dutch state.
Covered bonds are highly rated bonds issued by banks to
refinance residential mortgages or public-sector loans that remain
on the lender's balance sheet.
Banks are required to maintain the credit quality of the pool of
loans, sometimes in accordance with specific covered bond
legislation. Unlike mortgage-backed securities, investors have a
claim both on the bank that issued the bond as well as the assets
underlying it.
Covered bond issuance has rocketed since the European Central
Bank announced in May that it would buy EUR60 billion of covered
bonds to support bank funding and counter the impact of the credit
crunch.
The ECB outlined further details of its program in June, and
last Thursday said that much of the purchasing will be carried out
by the euro zone's national central banks.
"It seems that 92% of the EUR60 billion will be allocated pro
rata to each central bank according to its share of the ECB's share
capital," said Richard Kemmish, head of covered bond origination at
Credit Suisse in London.
"That still gives the ECB 8%, or around EUR5 billion, to
allocate centrally, which is significant buying power in this
market," he said.
It appears the ECB is leaving the detail of how to implement the
purchases to national central banks, but this doesn't seem to
concern the market.
"Issuance since the first ECB announcement has been spectacular,
and there is still a reasonable flow of deals, which is
encouraging," said Tim Skeet, head of covered bonds at Bank of
America Merrill Lynch.
"The absence of precise detail on how national central banks
will implement their purchases keeps all their options open and
therefore minimizes disruption," he said.
A syndicate banker said that, judging by secondary market flows,
there were no clear indications that the ECB or national central
banks were yet buying bonds in the secondary market Monday.
Two sovereign borrowers were also active Monday. Poland is
planning to sell a 10-year, dollar-denominated benchmark bond.
And Italy has set price guidance on a new 15-year syndicated
government bond, also known as a BTP, maturing March 2025, at 19-24
basis points over the 2023 BTP.
The only non-bank corporate borrower in the market with a
benchmark transaction was German sports apparel maker Adidas
AG.
The company is planning to offer a EUR500 million, five-year
bond at a spread of 200 basis points over mid-swaps.
-By Mark Brown, Dow Jones Newswires; + 44 (0)207 842 9485,
mark.brown@dowjones.com (Sonya Cheung in London contributed to this
report.)