The Covered Bond Report

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Supply revival anticipated in possible spread stability test

Euro issuance is widely expected to pick up this week, with core issuers including a Benelux name said to be eyeing the market, potentially testing whether stabilised spreads can withstand increased supply. Oberbank is set to market a EUR300m debut next week.

Oberbank headquarters Linz imageOnly two euro benchmark covered bonds have been issued so far this month, a EUR500m 15 year for Raiffeisen-Landesbank Steiermark on 3 May and a EUR500m five year for Deutsche Bank last Tuesday. This relative lack of supply – coming after record April issuance of EUR16.75bn last month – was attributed to the interruption caused by various public holidays across Europe over the last two weeks and to banks’ blackout periods.

Bankers expect an upturn in euro supply across the capital structure this week, given it is the only week of the month with no European public holidays and after many banks have now announced their results.

Syndicate bankers expect this supply to include a substantial amount of covered bond issuance, with mainly core names said to be monitoring the market ahead of potential benchmarks, including one issuer from the Benelux region that is expected to launch a deal this week. Some core issuers are also said to be considering sub-benchmark deals for this week.

“There is not a huge pipeline for covereds, but there will definitely be deals,” said a syndicate banker.

Another agreed, noting that performance in secondary spreads and strong demand for this month’s two benchmark deals – coming after a more difficult period in April – should encourage more issuers to return.

“There is now a good window, and issuers that were waiting on the sidelines are now prepared to enter the market and have been speeding up the indication requests from syndicates, so I definitely think there will be some more supply,” he said.

“This is especially given the covered bond market is in a more healthy mode, with secondary spreads now moving sideways or tighter and some buyers coming back, after the three or four weeks of smooth widening in covered bond spreads.”

Syndicate bankers said that, should a substantial amount of supply emerge this week, it will provide the first test of the covered bond market’s stability since supply eased at the end of April.

“The very big test now is if there is more new supply coming, if that will be absorbed or if that will again cause a widening of levels,” said one. “It is not like the secondary market is booming, and if there is an oversupply I don’t think the backdrop is firm enough to absorb it without any widening effect.

“But the market is definitely stronger and it feels that we won’t continue with this relatively significant widening we have seen in recent weeks. Let’s hope that investors are willing to put cash to work and that on the issuer side, that the whole world does not try to come to the market at once.”

Another syndicate banker was less convinced about the potential for covered bond supply this week, expecting the flow of deals to remain limited and suggesting that most issuers will focus on higher beta asset classes.

An inaugural senior non-preferred benchmark for Danske Bank was the only live euro deal in the financials space today.

Aktia Bank is the only issuer with a publicly announced euro benchmark covered bond in the pipeline. The Finnish bank will on Thursday complete a European roadshow ahead of the expected euro benchmark issue with an intermediate maturity.

Oberbank announced this afternoon that it has mandated DZ Bank, Erste Group and UniCredit to arrange a European roadshow to introduce its covered bond programme, with an inaugural EUR300m issue to follow, subject to market conditions.

The roadshow will start on Tuesday of next week (22 May) and end on Friday of next week (25 May). As previously reported, the Austrian bank received a first covered bond rating – AAA from S&P – last year.