UK and Irish issuers will wait until after the UK’s referendum on EU membership next month before re-entering the covered bond market, according to bankers, in spite of tightening spreads and a Moody’s upgrade of Ireland, while Fitch today (Monday) assessed the potential impact on UK covered.

Ahead of the UK referendum on its membership of the EU – which will be held on 23 June – bankers noted that UK covered bond spreads have tightened in recent weeks – partially on the back of poll results that support the probability of the UK voting to remain, and in line with a general tightening across jurisdictions on the secondary market.

Syndicate officials cited a recent Eu1.25bn seven year issue for Lloyds, which was priced at 28bp over mid-swaps on 4 April. They noted the bond had initially widened to the low 30s, mid, reflecting wider moves on the back of Brexit concerns, before tightening to around 26bp at the start of May and to 24bp this morning. They added that UK curves had in general tightened 1bp-2bp since last Monday, and month-on-month were 3bp-4bp tighter.

Syndicate officials also said that Irish covered bond spreads had converged with UK spreads this year, with the most recent Irish benchmark issue, a Eu1bn seven year for AIB that was priced at 54bp over mid-swaps in January, quoted flat to Lloyds’ issue at 24bp.

Moody’s upgraded Ireland from Baa1 to A3 on Saturday – citing a stronger economic recovery – and said that while a UK exit from the EU would have negative repercussions for Ireland, given the countries’ close economic ties, it considers this risk to be manageable for the Irish economy.

Syndicate officials added that Irish spreads had not widened on the back of Brexit concerns, having remained roughly stable in recent weeks and tightened in line with other jurisdictions throughout the year.

“Irish spreads are definitely outperforming the UK,” said one. “That’s purely because Ireland is less exposed to the impact of a Brexit.

“Not that Irish spreads are completely unjointed – it would have some negative impact, but they are more sheltered.”

Bankers said UK issuers are unlikely to tap the covered bond market before the referendum on 23 June, given the potential for spreads to tighten should the UK vote to remain.

“It seems like that’s a lot of people’s base case,” said one.

Another syndicate official noted that top tier UK issuers have tended to trade in line with Scandinavian issuers, but that in the Brexit-influenced market Lloyds’ seven year paper is quoted at 24bp while Stadshypotek 2023s are quoted at 7bp.

“I’m not saying UK names are definitely going to tighten by 15bp, but there could reasonably be around 5bp-10bp of tightening,” he said.

Bankers meanwhile said that Moody’s upgrade of Ireland could be supportive for Irish covered bond issuance, and noted that supply has been limited to only AIB’s issue so far this year, but said Irish issuers are also likely to wait until after June before entering the market.

“The Irish banks will also probably be on wait and see mode, given that, if the UK stays, you’d expect there to be some positive spillover effects,” said one.

In a special report published today, Fitch assessed the potential consequences on its ratings of four hypothetical scenarios: that the UK remains in the EU, that the UK leaves and secures subsequent favourable exit terms, that the UK leaves with unfavourable terms, and that the UK leaves under either scenario and Scotland subsequently votes to leave the UK.

Fitch said that the remain scenario – which is the rating agency’s base case – would be mildly positive for UK-based ratings because it would end the political and economic uncertainty caused by the Brexit debate in the medium term. The rating agency added that a vote to remain should support banks’ funding plans being achieved at lower rates.

Fitch said the impact on covered bonds of a UK exit on favourable terms would also be limited due to the low weighted average loan-to-value ratio of UK issuers’ cover pools and limited buy-to-let (BTL) exposures. It added that all UK covered bond programmes have comfortable overcollateralisation (OC) buffers against the minimum level of OC that would be expected to maintain current covered bond ratings.

However, under the third scenario, Fitch said the rating performance of UK covered bonds be more influenced by any potential bank rating actions than cover pool asset performance. Fitch noted that that six of 13 UK covered bond programmes it rates have no rating notch buffer against negative rating actions on the issuer.

The rating agency said the risk posed to non-sterling-denominated covered bond programmes by a more severe depreciation of the currency would remain fully offset by FX swaps, but added that any rating actions on banks could reduce the number of potential counterparties.

Potentially higher refinancing costs of covered bonds could also increase the level of OC expected to support ratings in this scenario, Fitch said, while falling house prices could reduce the proportion of loans on balance sheet below the LTV eligibility threshold defined in the programmes in this scenario.

However, it said that notwithstanding a reduced balance of eligible loans, OC expectations would still be accommodated by the existing comfortable OC buffers, and the still plentiful availability of unencumbered assets on issuers’ balance sheets.

Fitch added that a Scottish exit from the UK, in the fourth scenario, would have a limited impact on UK covered bonds. It noted that the 13 rated UK programmes have limited exposure to Scotland, of 7% on average, and said that cover pool diversity and available OC levels suggest programmes would be sufficiently protected.

However, it added that some transactions – such as Clydesdale Bank’s covered bond programme and its Lanark Master Trust securitisations, which have higher exposures in Scotland of up to 30% – would be likely to be more negatively affected.