The covered bond market could reopen next week should the UK vote to remain in the EU today (Thursday), according to bankers, although expectations for summer supply are modest, while a victory for the leave campaign is seen as potentially closing the market until September.

The UK is holding its referendum on EU membership today, with the result expected to be announced early tomorrow (Friday) morning.

Primary market supply has dried up across asset classes in the run-up to the referendum, with the last euro benchmark covered bond a Eu750m seven year issue for BRFkredit on Wednesday of last week (15 June). Bankers involved in those deals that did arrive in recent weeks cited increasing uncertainty as reducing investor appetite and raising execution risk.

Should the UK vote to remain, bankers said that the market could reopen as soon as next week, with issuers able to take advantage of easier conditions and rallying demand.

“With a remain vote, I think we could pick up from where the market left off earlier in June,” said a syndicate official. “With the uncertainty cleared up, I’m confident that we’ll have a happy market to work with, and we could see at least one or two issues next week.”

However, with issuers having sold some Eu92bn of euro-denominated benchmark covered bonds year-to-date, bankers said that many issuers are already well advanced with their funding plans for the year, and that a widespread lack of pressure to rush to the market will keep supply modest over the summer period.

“I don’t get the feeling that there is a big pipeline of issuers itching to get into the market,” said a syndicate official. “Many are watching the result with interest, of course, but we have had a busy few months.”

Other syndicate officials said that issuers could wait until July to re-enter the market, in order to assess the market reaction.

In the event of a UK vote to leave, meanwhile, bankers said the market would remain closed.

Michael Weigerding, research analyst at Commerzbank, said that in this scenario the covered bond market would be particularly difficult to access in July.

“Hence, we believe most issuers will hold back and – in view of the imminent summer lull – postpone any new issue attempts until the market returns to calmer waters, probably in September,” he said. “Lacking primary market activity and increased risk aversion among market makers and investors should add to liquidity drying up on the covered bond market, potentially driving up volatility risks for all segments.”

Bankers also noted that, after a repricing in March and April, UK covered bond spreads had generally remained resilient to the widening pressure that had affected the senior secured and other markets, and, along with other jurisdictions, had benefitted from a recent compression between non-Eurozone and Eurozone spreads.

However, after opinion poll results raised doubts and more investors began to position themselves for a “leave” victory, UK spreads began to widen slightly. Peripheral covered bond spreads have also come under widening pressure as a result of the uncertainty, with the Italy and Spain iBoxx covered bond indices widening by 3bp over the last two weeks.

Market participants said UK and peripheral spreads could tighten substantially if the UK votes to remain, with some expecting UK spreads to rapidly reprice in line with compressed Nordic spreads.

“British issuers will welcome the reopening of the covered bond market,” said Commerzbank’s Weigerding. “We understand that most institutions are under no issuance pressure, but some may want to use the lower spread levels for secured issuance, too.

“However, these volumes should not slow the tightening trend.”

In the event of a vote to leave, analysts said UK spreads could widen even further from their current levels, while peripherals would continue to underperform.

Also tomorrow, the European Central Bank will announced the take-up of a new series of four targeted longer-term refinancing operations (TLTRO II). Bankers said the availability of the TLTROs could moderate the flow of covered bond issuance in a remain scenario.

Photo: UKIP leader and Brexit campaigner Nigel Farage (archive photo); Source: European Parliament