New Zealand’s BNZ is taking indications of interest for a five year euro issue after a muted market reaction today (Monday) to Standard & Poor’s downgrades of nine euro-zone countries late Friday, while Nationwide has launched a sterling denominated three year covered bond.

Leads DZ Bank, JP Morgan, NAB, Natixis, RBS and UniCredit have set initial pricing thoughts for the BNZ International Funding five year issue at 125bp-130bp over for a Eu500m minimum size. It is the first New Zealand covered bond to hit the market this year.

Outstanding Westpac NZ June 2016 and a BNZ November 2017 issues were trading at around 105bp-108bp over, according to a syndicate banker at one of the leads.

“We’re giving a pick-up of about 15bp-20bp,” said a syndicate official at one of the leads.

He said the trade looks like being tomorrow’s business.

BNZ parent National Australia Bank sold a Eu1bn five year euro debut at 100bp over mid-swaps on 5 January.

Nationwide Building Society was in the market with a January 2015 floating rate covered bond that it will price at 165bp over mid-swaps following guidance of 165bp-170bp over.

Leads HSBC, RBC, RBS and UBS built a book of more than £600m (Eu725m).

“They’re targeting the domestic investor base,” said a syndicate official, “Maybe there will be additional demand from international investors.

“I don’t think this deal will struggle at all.”

Another syndicate official away from the leads said that it made sense for UK issuers to tap the sterling market given that there are no swap costs involved and deals do not use credit line capacity. He would have seen the level at 170bp over, he added.

Nationwide’s deal is the third syndicated sterling covered bond this year, following deals for Barclays Bank and Royal Bank of Scotland. Barclays on Friday sold a self-led £750m three year floating rate covered bond at 155bp over three month Libor.

S&P’s downgrades on Friday included a cut of France and Austria from AAA to AA+ and downgrades of Italy, Spain, and Portugal by two notches.

Italian government bonds opened about 25bp wider this morning, but came back in by about 10bp by mid-morning, according to a market participant. France and Belgium were also wider.

“We’re not seeing anything radically wider,” said a syndicate official. “There have been pretty decent specs this morning, especially of Spain.

“We have not seen any selling of covered bond deals, I think because most of the investors have been buy-and-hold investors.”

Syndicate officials said the S&P rating actions had largely been priced in by the market as they had been well flagged.

“We also see other raters taking a different view, with Fitch, for example, underwriting the rating on France just a few days ago,” said one. “I think outstanding bonds could be quite safe.”

Fitch last Tuesday said France’s AAA rating was unlikely to be downgraded in 2012.

The syndicate official added that although the window was not closed for European issuance, he thought issuers would rather wait a few days to absorb the news.

Bernd Volk, head of covered bond research at Deutsche Bank, expected public sector bonds to be more impacted than mortgage covered bonds. He noted that S&P typically has a six notch maximum uplift from the sovereign rating on covered bonds for non-sovereign issuers of EMU countries. For public sector covered bonds with “high” public sector exposures, the maximum uplift is one notch, he said, barring mitigating factors.

“French and Austrian covered bonds are not directly impacted because of the AA+ rating on the sovereigns,” he added.

However, he noted that Italy’s new BBB+ rating should now cap Italian covered bonds at AA+. The only OBGs rated AAA by S&P are those of UniCredit.

A syndicate official said issuance might also be on hold because of events this week including a holiday in the US today and auctions and data later in the week.

“The whole scene around Greece did not get attention over the last couple weeks,” he added, “so it will be interesting to see what comes from the negotiations this week.”

Negotiations will resume on Wednesday between the Greek government and private lenders on the issue of Greek debt.

“It’s a haircut issue, but it’s also an issue of what premium will be on a new Greek issue,” he said.