Hypo Vorarlberg will start roadshowing for an inaugural benchmark covered bond in early April, it said today (Monday), but at least one new issue project is said to have been put on hold due to volatility sparked by Cypriot bail-out proposals that will hit depositors.

Bank of Cyprus

Vorarlberger Landes- und Hypothekenbank AG (Hypo Vorarlberg) has mandated Barclays, Crédit Agricole, DZ Bank, LBBW and UniCredit to lead manage its inaugural benchmark transaction, which is planned for launch after the end of a European roadshow starting on Monday, 8 April.

According to a syndicate banker at one of the leads, the size and the tenor of the issue have not yet been discussed given the early stage of the process, and will be influenced by the feedback received by investors during the roadshow.

Hypo Vorarlberg will issue Pfandbriefe under the Austrian Mortgage Banking Act, with the bank now looking at covered bonds in a “strategic decision” to diversify its funding base, said the lead syndicate banker.

Meanwhile, issuance plans for the beginning of the week were put on hold because of market reaction to the announcement over the weekend of a proposal to impose a levy on deposits held in Cypriot banks as part of a bail-out of the country, said a syndicate banker.

He said this morning that the possible launch of a covered bond issue from a core jurisdiction was put on hold out of “prudence” until a planned vote on the Cypriot proposal in the country’s parliament this afternoon. However, the vote has been postponed.

The bail-out proposal sparked market volatility, especially in sovereigns, with 10 year government bonds of peripheral jurisdictions such as Ireland, Italy, Spain and Portugal widening this morning, according to market participants. Volatility also affected senior unsecured bank spreads, but the impact on covered bond was limited, they said.

A syndicate banker said that the proposal was a “game changer”, especially for sentiment toward the periphery, and added that the success of Bank of Ireland’s Eu500m five year trade launched on Friday (see separate coverage here) would not have been possible in today’s market conditions.

“The proposal could set a dangerous precedent and create massive disparities among issuers in Europe,” he said.

Jan King, non-independent desk strategist at RBS, said that although spread volatility did not affect core countries, issuance could be limited from all jurisdictions because of a general feeling of investors looking at developments in Cyprus rather than at investment opportunities in the covered bond market.

According to King, Cyprus’s move to impose a levy on deposits is unlikely to have a direct impact on covered bonds at a systemic level given the limited amount of Cypriot assets in cover pools of European issuers.

Given that Cypriot covered bonds have been retained for ECB repo purposes, covered bond investors should not be impacted, he said.

Another syndicate banker said that the impact on the market may be limited regardless of the outcome of the Cypriotary parliament session, and that activity in the covered bond primary market could resume as early as Wednesday.