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Covid measures seen limiting 2021 supply to some €107bn

The average forecast for 2021 euro benchmark supply among analysts surveyed by The CBR is €107bn, with the lowest forecast, €90bn, even lower than this year’s near €94bn, but the highest as much as €120bn-€125bn – not far off what had been forecast for 2020 before Covid-19 hit.

Analysts are united in expecting the factors that severely dented issuance levels this year to persist into the coming year, with issuance remaining similarly subdued.

“A long term comparison makes the weakness of this year’s new issuance even clearer,” said BayernLB analysts. “According to our records, it is the lowest year since at least 2005 (!). The main reason is the extremely favourable liquidity support offered to banks to combat the corona effects, which makes covered bonds comparatively expensive for issuers.

“After 2020,” they added, “there are therefore many indications that the volume of covered bond issues next year will also be significantly below the long term average.”

Their 2021 forecast of €100bn-€105bn of gross euro benchmark supply is just slightly below the €107bn average of 14 banks’ forecasts.

2021 euro benchmark supply forecasts

BankForecast (EUR bn)
ABN Amro110
Barclays120-125
BayernLB100-110
Commerzbank110
Crédit Agricole100-105
Danske102
Deutsche114
DZ90
Helaba105
ING110
LBBW115
Natixis90-100
NordLB105
SG100-110

DZ Bank’s forecast was the lowest of those surveyed, at €90bn.

“Although we are convinced that covered bonds will continue to play an important role for banks – especially for longer term refinancing – and that demand in the covered bond market will also remain high next year, not least due to ECB purchases, we nevertheless see a number of factors that point to a decline in the issuing activity of banks issuing covered bonds,” said DZ analyst Verena Kaiser.

“In particular, the cheap central bank money through TLTRO III, which allowed banks to refinance themselves favourably this year and in some cases to prefinance them, should reduce the need for refinancing by issuing covered bonds. In addition, banks are also faced with regulatory requirements that they can meet, for example, by issuing unsecured bonds. The uncertainties associated with the corona crisis remain.”

She noted that France, Germany and Canada would be among the biggest contributors to 2021 issuance, in line with several analysts. However, significant variations in forecasts for individual countries contribute to differences in overall supply forecasts, even if analysts expect the same trends.

Barclays has the highest euro benchmark forecast, at €120bn-€125bn, and its forecasts for France and Germany in 2021 are €30bn and €20bn, respectively, much closer to 2020’s figures than DZ’s forecasts of €20bn and €15bn. Barclays’ figures for France and Germany are for benchmark issuance across euros, sterling, and US, Australian and Canadian dollars; however, in recent years supply from the two jurisdictions outside euros has been minimal and the analysts expect arbitrage conditions to favour euros in 2021.

They expect overall benchmark covered bond issuance across the various currencies to reach €135bn-equivalent in total, up from just over €100bn this year.

“The slightly higher expectations of gross supply in 2021 than this year mainly reflect increased redemptions,” said Barclays’ analysts.

They noted that redemptions across currencies next year will total €162bn, up from €138bn this year, implying a decline in outstandings of €27bn, versus a €37bn drop this year.

SG analysts’ forecast of €100bn-€110bn for euro benchmarks in 2021 is among those closest to the €107bn average, and regarding euro benchmarks only, they expect net supply of minus €25.3bn next year, based on redemptions of €135.3bn and supply of €110bn. This would be almost the same as negative net supply of €25.1bn this year, based on €118.6bn of redemptions and €93.5bn of supply.

The forecasts for euro benchmark covered bond issuance are drawn from research published between the end of October and early this week, a period during which the prospects of a Covid-19 vaccine have quickly moved from hope to reality, with the first dose of a Pfizer/BioNTech vaccine outside a trial received in the UK yesterday (Tuesday) (pictured).

Joost Beaumont, senior fixed income strategist, ABN Amro, said his €110bn forecast assumes that vaccines allow for a significant lifting of restrictions during the course of the coming year, allowing for a strong rebound in the second half, helped by stimulus. He noted that earlier than expected vaccine programmes allowing for lockdowns to be unwound soon could contribute to greater issuance, while delayed lifting of lockdowns or vaccines being less effective than hoped could dampen supply prospects.

As well as central bank funding reducing covered bond supply, alternative instruments are expected to be in focus for issuers for either economic or regulatory reasons. Barclays analysts, for example, noted that the average swap spread differential between senior preferred and covered bonds has narrowed from a historical average of 39bp to around 25bp.

“From a pure funding cost perspective, it has become less attractive to fund through covered bonds than senior unsecured bonds,” they said. “At the same time, banks in some large covered bond jurisdictions need to focus on issuing TLAC/MREL-eligible or subordinated debt to fulfil regulatory requirements.”

Given the negative factors impinging on the market, Crédit Agricole analysts asked: “Why would banks issue covered bonds at all?”

They highlighted three reasons. Firstly, that many issuers prefer to remain active and engaged with investors throughout the cycle.

“Volumes will vary year on year but many will at least be in the market once,” said CACIB’s analysts. “Even some UK banks (the large ones, and Yorkshire Bank recently mentioned this as well) have said they plan to provide investors with some issuance despite TFSME (Bank of England Term Funding Scheme with additional incentives for SMEs) being cheaper and offering maturities that UK banks issue in the market.”

Secondly, they noted that many issuers in the Nordics, Canada and Asia – and even some in the Eurozone – do not have access to the same degree of central bank liquidity as most in the Eurozone and the UK. And thirdly, to term out funding beyond central bank money.

Photo Credit: NHS England and NHS Improvement/Twitter