2018 supply forecasts maintained despite record April
Initial projections for 2018 euro covered bond supply may prove overly pessimistic after a record April took year-to-date benchmark issuance to some EUR65bn, but analysts are sticking to their forecasts, with supply expected to slow post-summer and potentially post-QE.
Euro benchmark covered bond supply totalled EUR16.75bn in April from 19 deals, including taps, setting a new record high for April issuance. In April 2017, issuance totalled just EUR7bn.
Year-to-date euro benchmark issuance stands at EUR64.65bn, including taps. This is up from EUR53.70bn in the same period last year, and represents well above half of the EUR100bn-EUR110bn forecast for 2018 supply by many analysts at the end of last year. Analysts then cited unusually low redemptions – the lowest since 2008 – and issuers’ rising TLAC/MREL needs among reasons to expect another year-on-year fall in supply.
The primary market is widely expected to be quieter in the second half of 2018, with much of the year’s supply expected to be frontloaded before the current earliest end-date of the ECB’s QE programme, at the end of September.
“It could be that we all find ourselves with less to do after the summer,” said a syndicate banker.
However, some see the potential for 2018 issuance to surpass initial expectations.
“For our defensive December forecast of a full-year issuance volume of EUR100bn to remain within reach, the first four months would have to account for an even larger share than in 2016, when they contributed some 62% to the annual euro benchmark volume,” noted analysts at Commerzbank. “This means supply would have to see an exceptionally sharp drop in coming months.
“This assumption seems increasingly pessimistic.”
Other analysts said they are sticking to their predictions. Maureen Schuller, head of financials research at ING, initially forecast EUR100bn. She said it is too soon to change this forecast, citing the expectation that supply has been frontloaded and that funding levels will be less attractive to issuers by year-end.
Bernd Volk, head of covered bond and SSA research at Deutsche Bank, noted that his prediction of EUR115bn-EUR120bn could now appear too cautious given April’s historically high supply and the likely change in ECB policy, but said he is standing by it for now “also supported by numerous dovish ECB comments”.
April’s heavy supply has added to widening pressure on covered bond spreads, with core issuers offering increasingly large new issue premiums throughout last month. The iBoxx Euro Covered Bond index widened some 3bp in April.
Despite the higher new issue premiums required, issuers continued to tap the market in the belief that funding levels could be less attractive after the summer, as the expected end of ECB QE nears amid a lowering of CBPP3 orders. Some bankers and analysts suggested that spreads are beginning to stabilise, and that widening pressure could be eased on the back of lower supply to come.
“I don’t think we’ve seen the end of the widening yet, but recent deals suggest that spreads and premiums have come to a level that investors are broadly happy with,” said a syndicate banker.
Issuance is expected to remain relatively limited this week given that banks in many covered bond-issuing jurisdictions remain in blackout periods and with public holidays across Europe today (Tuesday) having narrowed the issuance window. Supply had already slowed last week, when just two euro benchmarks were brought to market after 14 euro benchmarks in the previous two weeks.
Issuance could resume tomorrow, with Raiffeisen-Landesbank Steiermark set to launch a EUR500m long dated deal after holding investor calls on Monday.