A three notch downgrade of Spain late yesterday (Thursday) was the latest macro news in an eventful and holiday-impacted week, and the outlook for next week appeared unclear today, with opinions differing as to the likelihood of euro covered bond supply.

Protester in Madrid's Puerta del Sol

Fitch cut Spain three notches from A to BBB and was said to be around 20bp wider today (Friday) and analysts were considering the likely impact on cédulas ratings.

“While the downgrade of Spain only adds to the pressure on the sovereign, the only ray of light could be that this brings forward discussion of a strong policy response on the European level,” said a RBS covered bond analyst. “Absent this, the downgrade will only likely make things tough for primary issuance in the covered bond space.”

One syndicate banker was ruing a lack of supply this week, which he said had shown a brief issuance window for financials, in spite of the various wider events affecting sentiment and activity.

However, a syndicate official said there are up to eight issuers potentially looking to kick off new issue projects, “to be ready at the ‘B’ of the bang”, and that the pipeline looked like it will be busy.

Another syndicate banker said that with recent supply having gone well other issuers will be looking to take advantage of any benign issuance conditions ahead of Greek elections at the end of next week.

But others were more downbeat.

“I don’t see the pipeline growing very much because to me investors are still very, very reluctant to look at other credits except Scandis and Germans,” said a syndicate official. “Maybe we could potentially look at the UK, but they have the sterling market and the basis swap is in favour of issuing domestically.

“It’s the same for the Swedes, and both are very much in advance on the funding side, too.”

Terra BoligKreditt roadshowed this week with Commerzbank, Nordea, UBS and UniCredit and is considered a candidate for a new issue next week, while Norwegian peer DNB has also been mentioned, with Dow Jones today quoting its CEO today saying that it is considering an issue in the second or third quarter.

A syndicate banker said that Terra could be looking at a five or seven year deal. He put DNB five year paper in the low 30s over mid-swaps in the secondary market and said that Terra was about 15bp back of this, but could look to tighten the differential in any new issue, while DNB itself, although unlikely to issue a five year given previous heavy issuance in the 2017 maturity, could also push for tight pricing.

“At the moment, with so little supply, they would probably be looking to come flat to the curve,” he said.

Another syndicate banker said that he expected any Terra issue to be well received.

“It is a solid credit with not a lot of outstandings, and recently reshaped its structure,” he said. “It is going in a good direction and I understand the roadshow went well.”

BayernLB is seen as a candidate to add to German supply, while French hopes have been reined in.

“It is painful for the French, too,” said the syndicate banker. “We were hoping that CRH could have reopened the sector, but it didn’t.

“We do think it could come, especially after the rally in OATs, offering a nice pick-up over govvies. They have also been stable against swaps.”