HSBC Bank yesterday (Tuesday) made its US covered bond debut, selling a $1.25bn three year issue that was hailed as an achievement given US investors’ wariness about Europe’s debt problems. Meanwhile, a Pimco portfolio manager was optimistic about further dollar supply.

HSBC’s Regulated Covered Bond was priced at 58bp over mid-swaps, equivalent to 92.75bp over US Treasuries, by leads HSBC, BNP Paribas, Royal Bank of Scotland and Société Générale. That compares with a re-offer spread of 60bp over mid-swaps for a $1bn five year Credit Suisse issue that was the last dollar benchmark covered bond to hit the market, on 24 May.

A syndicate official away from the leads said the deal was competitively priced versus euro levels, but that this was not entirely surprising given the global name recognition that the UK bank commands and the role this would play for the US investor base.

He described HSBC’s ability to print a deal against a backdrop of troubled European markets as a “very strong signal”, in particular given a tendency for spreads in the dollar market to be more responsive to European developments than spreads in euros.

“The more distant an investor base is the more worried they are,” he said, “and you could really see that in the US market.”

He said that this contributed to issuance windows in the US market being more narrowly defined for European issuers than opportunities in euros.

German issuers NordLB and Münchener Hypothekenbank are said to be candidates for further dollar covered bond supply, with another Pfandbrief issuer also understood to be considering such a project.

“For the Germans to fund competitively will be an interesting project given that their levels are tight in euros technically and from a relative value standpoint,” said the syndicate official.

Another dollar project in the pipeline is a second covered bond from Korea Housing Finance Corporation, which this week finishes a roadshow. An ensuing deal will probably come with a five year maturity, The Covered Bond Report understands.

Pimco sees bright US prospects

Ben Emons, senior vice president and portfolio manager at Pimco, said in a research note that more foreign banks could find the dollar market a useful place in which to refinance government guaranteed issuance.

“Australia, Canada and the UK are seeing the benefits of covered bonds for stable funding of their banking system and have also seen the introduction of legislation that is supportive of covered bonds,” he said. “As their banks already use US dollar explicit government guaranteed issuance for funding, that debt could conceivably be rolled over into US dollar covered bonds.”

Emons cited Basel III and Solvency II as potentially having positive implications for demand for covered bonds, with the Net Stable Funding Ratio likely to prompt further supply. He also noted how covered bonds were exempted from bail-ins under European Commission plans and how the issue of subordination of depositors was being addressed.

“Although difficult to quantify with any precision, the impact on investor and issuer behaviours as a result of European regulatory developments has already begun to play out, despite the fact that compliance with Basel III is tentatively scheduled for 2018, Solvency II in 2013 and the EU resolution in 2014,” said Emons. “It is highly coincidental that record issuance of covered bonds in 2011 (Eu130bn through mid-June, according to RBS) was received with strong demand from European and global investors.”

Like some other market participants, Emons suggested that the renewed swell in dollar activity could aid the push for a US covered bond framework.

“More US dollar issuance will likely encourage legislators to push forward the US Covered Bond Act,” he said Emons.

He was optimistic about the prospects for US issuance, despite the Federal Deposit Insurance Corporation expressing concerns about the impact of covered bond issuance on the Deposit Insurance Fund, most recently in light of a House Financial Services Committee markup last Wednesday (22 June) when the United States Covered Bond Act of 2011 was passed.

“Still, the prospects for a large US covered bond market remain bright,” said Emons.

He said that once enacted, any US legislation could alter the way in which regional banks have relied on the Federal Home Loan Bank (FHLB) system for funding and become “a powerful source of issuance as well as demand for US covered bonds”.