On a panel at the European Mortgage Federation-European Covered Bond Council (EMF-ECBC) event in Athens, representatives of the four Greek issuers were asked when the next public issuance could emerge, by moderator Elena Bortolotti of Barclays and ECBC rating agency approaches working group chair. The last Greek euro benchmark supply was a spate of issuance between October 2017 and January 2018, kicked off by a National Bank of Greece (NBG) comeback.

“I think we all agree it’s a matter of ‘when’, rather than ‘if’, at this stage,” said Dimitris Spathakis, Piraeus Bank. “I think it’s clear by now that we all cherish and we like this instrument. We have been trying to optimise this, and we are all now at double-A area levels – the rating path is improving.”

He noted that Greek banks have in recent years been focused on the unsecured space.

“We have been spending enormous time and effort in building up our capital buffers and meeting our MREL leads, which by now all of us have met,” said Spathakis. “So covered bonds were nowhere near the funding plan agenda.

“I think that as we start to move back to a funding mix normality, if I can use the term, the covered bond is the obvious next step,” he added, “for the tenor diversification, instrument diversification, and, most importantly, to make sure that the last missing bit of investor audience, somewhere around the centre of Europe, that has not been looking still very rigorously on Greek banks, is tapped as well.

“Is it a 2025 business? I think not, but we are getting there.”

Eurobank’s Dimitris Psichogios said balance sheet developments at an aggregate level did not call for an imminent return to covered bond issuance, with the volume of mortgages outstanding declining in Greece, for example.

“Issuance at the moment would be effectively superfluous and could not be easily justified,” he said. “So the ambition may be there, but you need to have conditions supporting the exercise.

“We need to see balances becoming positive and consistently so, because it wouldn’t make sense to issue once, as we did in 2018, and not issue for a few years. If we come to the market, it would likely need to be some plan that we have to be accessing the market on a consistent basis, as the Nordics do, for example.”

Psichogios said a final decision would also need to be taken on whether conditional pass-through issuance, as previously commonly used in Greece (also in retained issuance, at times off different programmes of the same issuer), would still be appropriate.

“It was a fad to issue CPT a few years back,” he said. “Now everything seems to be moving towards the soft bullet.”

Public covered bond issuance is not part of Alpha Bank’s 2025 funding plan, but Ioannis Asimelis at Alpha Bank said the issuer will examine it for 2026, taking into account pricing levels, residential mortgage market developments, and NSFR.

“For the time being,” he added, “we are working on harmonising our public covered bond programme to ensure that we are operationally ready when the time comes.”

NBG’s Vassilis Kotsiras said that while banks globally had been busy adjusting their capital stacks and funding mix after the global financial crisis, the European Central Bank had dominated the covered bond market through its purchase programmes, meaning that among private investors, only bank treasuries were consistently focused on the asset class. However, he suggested a growing appreciation of the product among real money investors.

“We have seen recently the Iccrea transaction,” said Kotsiras, “which was a very promising transaction for the whole market, because it was a double-A issue and came at levels that made sense, they came at levels with a significant difference versus their senior preferred.”

Last Monday (28 April), Italy’s Iccrea Banca issued the first euro benchmark covered bond in almost two weeks and the first peripheral euro benchmark for two months, a €600m 5.5 year OBG priced at 52bp over mid-swaps.

“So I really believe that with this market environment developing, we will have much easier decisions to take on whether we will tap the market or not,” said Kotsiras.

“Lately, we have seen a lot of resilience of the product,” he added. “Within the tariff turmoil, covered bonds have performed very well, regardless of the rates volatility. Iccrea has done this important step after Novo Banco a few months earlier. So I think we’re in a positive trajectory.”

Kotsiras also dangled the prospect of a surprise Greek euro benchmark sooner than his peers had implied, noting that when NBG inaugurated issuance in 2009, traditional factors had not pointed towards such a move.

“In 2017,” he added, “nobody was expecting Greek banks to start with covered bonds.”

With pricing to be a key factor in the timing and execution of the return of benchmark issuance, Bortolotti invited the Greek representatives to share their early thoughts on appropriate considerations – and they were bullish on pricing inside government bonds, not least because of the country’s experience.

“The Greek covered bond of NBG that was issued in 2009 was the only instrument overall in the financial and public sector not being affected by all the turmoil,” said Kotsiras when highlighting how CPT structures had been appropriate for Greek covered bonds.

“Why should covered bonds be trading with a premium over the sovereign?” he later added. “I don’t know who is setting this rule, but the reality is that they have multiple notches of better rating than the sovereign. They have the non-bail-inability, which has been tested in jurisdictions like Greece, Portugal and other countries. They have amazing credit elements, collateral that really has value.

“So I think that the more the product is finding a foothold, more and more real money investors will be stepping in, and they will understand the merits and value of this product.”

Piraeus’s Spathakis seconded and expanded upon this argument.

“We are going to be testing this when the time is right, but it needs to be made clear that, unlike other jurisdictions, the delta versus the sovereign rating is significantly larger. So it is an unfair, to my eyes, to expect a spread against the Greek sovereign.”

Eurobank’s Psichogios agreed with Kotsiras on the importance of Iccrea’s transaction, which was priced 9bp below the BTP of the same maturity, the tightest such level achieved on an OBG of five years or longer since June 2022, according to the Italian issuer,.

“Our issues need to be fairly, properly priced,” said Psichogios, “and that would mean levels that are lower than the levels that were indicated just a few weeks back.”

Pictured (left to right): Bortolotti, Asimelis, Kotsiras, Psichogios, Spathakis

Moody’s upgraded the sovereign from B1 to Ba3, and the country ceiling from Baa1 to A3, citing ongoing reforms and positive growth prospects, notwithstanding the near term impact of the pandemic, particularly on the tourism sector. It said the banking sector has improved further over the past year, but still requires strong action to improve weak asset quality.

The upgrade of the National Bank of Greece (NBG) Global covered bond programme from Baa1 to A3 takes it to the updated country ceiling, and it is now also constrained by the Timely Payment Indicator (TPI) of “probable-high”. NBG’s outstanding euro benchmark is issued off this programme, while it also has a second programme.

Eurobank’s programme 2 was also upgraded, from Baa3 to Baa2, on the back of the sovereign upgrade, and furthermore an improvement in its TPI from “very improbable” to “improbable”.

“The raising of the TPI is underpinned by the combination of different factors that have lowered the refinancing risk of Greek covered bonds,” said Moody’s, “including (1) the improvement of the Greek economy as reflected in the upgrade of the Greek’s sovereign ratings, and (2) stronger market liquidity, reflecting more favourable operating conditions for Greek banks.”

The covered bonds’ rating is now constrained by the TPI.

Eurobank has three covered bond programmes and its outstanding benchmark is issued off programme 1.

The country ceiling was raised after Fitch on 24 January upgraded the Greek sovereign from BB- to BB and changed its outlook from stable to positive. The covered bond upgrades, which followed a periodic review of the programmes, also took into account an update to Fitch’s structured finance and covered bonds country risk rating criteria and a February recalibration of its stresses for Greek mortgages.

Fitch’s National Bank of Greece (NBG) upgrade is of the bank’s Programme II, which its benchmark covered bond is issued off.

For NBG, another factor in the upgrade was a reclassification to primary residence of properties backing almost half the cover pool.

“These were previously conservatively classified as ‘holiday home’ or ‘other’, which attract a 50% foreclosure of frequency increase compared with loans backed by primary residences,” the rating agency said. “The reclassification comes after the issuer created a new reporting system that more accurately retrieves the property purpose at the time of the loan’s origination.”

Partial cancellations of retained covered bonds were also a factor in the upgrades, as well as changes to the terms of Piraeus’s, Fitch said.

As well as upgrading the NBG and Piraeus programmes, the rating agency affirmed the BB+ rating of Alpha Bank covered bonds and removed them from Rating Watch Positive. All three programmes are on stable outlook.

Fitch noted that any material improvement of the refinancing spread assumptions for Greek residential mortgage loans is now unlikely given the increased volatility in bond spreads that followed the coronavirus pandemic outbreak.

With the Greek banking industry having to wait a further year before hosting a European Covered Bond Council plenary, The Covered Bond Report invited Kotsiras, head of capital markets and structured finance, group treasury, at the National Bank of Greece, to share the bank’s experience at the centre of one of covered bonds’ sternest tests, and to discuss Greek banks’ wider capital markets activity from one crisis to the next.

In a complementary article, Dr Tasos Anastasatos of Eurobank explores the outlook for the Greek economy in light of the Covid-19 crisis.

The Covered Bond Report: National Bank of Greece’s experience puts it centre stage in the country’s history with covered bonds: benchmark issuance before the sovereign debt crisis, the subsequent performance of the issuance, and the eventual reopening of the bond markets for Greek banks with a benchmark covered bond. What can we take away from NBG’s experience with covered bonds? What lessons could we learn that might be relevant to the current crisis?

Vassilis Kotsiras, National Bank of Greece (pictured): Covered bonds were one of the most valuable instruments throughout the crisis. NBG issued the first covered bond back in 2009, but thereafter the market deteriorated due to the country’s debt crisis. However, until 2012 Greek banks issued and retained a large amount of covered bonds as they were one of the few assets they could use as collateral in the ECB’s framework. Afterwards, as they lost their investment grade rating, they were among the first assets to be used as collateral for interbank lending with international banks back in 2014. In 2016, they again assisted us in re-accessing the interbank market following the 2015 share capital increases.

NBG considered that it was the right instrument for regaining access to the global debt capital markets and issued a three year covered bond in 2017 rated in the single-B area. Eurobank followed and Alpha Bank did likewise in 2018, with a five year issue. The performance of the issues was phenomenal, especially after NBG managed to regain the investment grade rating from S&P back in July 2018. In less than a year we managed to move from B to investment grade, and real money investors put the on spotlight Greek covered bonds. NBG covered bonds now have investment grade ratings from all three major rating agencies.

What were the key takeaways from this experience?

● We adopted the Irish example, as we call it, to access the market with secured non-bail-inable instrument such as the covered bond, and investors welcomed this choice.

● We worked with credit investors from the beginning of 2016, presenting them with the bank’s restructuring plan and giving them visibility for the following quarters. That enabled us to rebuild our credibility, as the bank was progressing in all fields and delivering on its commitments.

● Investors want a realistic and tangible plan along with actions to implement it. That’s key if they are to support you.

● Apart from the bank’s story, you need to provide a story for the instrument being issued. In the case of the covered bond, this was the road to investment grade, an appropriate structure, and the high quality collateral and data provided.

Following the Covid-19 outbreak and the turmoil that affects the core of our living standards, I believe we need some time to realise the actual impact and digest the actions from the regulators, governments and central banks. I believe that tapping the market again will depend on when we will be able to provide credible visibility to investors for both the country and the banks.

The CBR: Two of your compatriots issued Tier 2 transactions shortly before the Covid-19 crisis hit capital markets, after you issued last year. What does the execution of their issues tell us about how sentiment towards Greece was developing ahead of the crisis? Had Greek banks’ capital markets activity finally become normalised? Could we see a Greek AT1 when conditions improve?

Kotsiras, NBG: From the last quarter of 2019 until February 2020, markets experienced a phenomenal rally. We had six Greek corporates tapping the market, the Hellenic Republic achieving great results with its issues, while Alpha Bank and Piraeus tapped the Tier 2 market with great success and great oversubscription. I could tell that, back then, market access had fully normalised.

However, the Covid-19 crisis disrupted the country’s road to recovery at a very crucial turning point. All the banks have announced major NPE clean-up transactions, the economy was growing, the real estate market was booming, and investments were materialising in the tourism, energy and infrastructure sectors. Now we need to manage the impact along with the government, business and society. Normalisation is something we will need to wait some time for to experience again.

AT1 is part of the MREL requirements and hopefully at some point Greek banks will issue. Having said that, the introduction of a new instrument to the market signals a new chapter. Covered bonds signalled the return to the market and did away with any thoughts of Grexit. Tier 2 was a vote of confidence in the Greek banking sector’s return to a healthy balance sheet. AT1 will signal the return to normalisation and profitability. It is in my view a P&L instrument and the crisis is delaying that new chapter for at least a year.

The CBR: How has the crisis affected your funding plans for this year? Will there be less public issuance from Greek banks?

Kotsiras, NBG: Although it is too early to tell definitively, we should expect fewer public transactions. Greek banks do not face any liquidity issues, and hence are not under pressure to issue at any level. I believe that after the summer investors and issuers out of Greece will be able to reassess their plans, having seen the impact of the crisis on financial results and the performance of the Greek economy. Greek banks need to maintain access to the market, but in a manner that won’t be punitive for their NII and their shareholders.

The CBR: How satisfactory is the treatment of Greek debt and in particular Greek covered bonds by the ECB in its collateral framework and purchase programmes?

Kotsiras, NBG: I prefer to focus on Greek covered bonds as it is a matter that has troubled us a lot at the past.

The essence of QE is to encourage and boost the market around specific instruments in order to enhance economic activity without jeopardising the funds of the central banks. Covered bonds were the first instrument to be part of an ECB purchase programme back at the end of the previous decade, and the reason is that in enhancing the mortgage market you enhance the real estate market and the economic activity of a country that relies on housing. Our 2009 issue was purchased by the Bank of Greece as an eligible instrument. In 2014 the ECB announced special conditions to be met in order that non-investment grade covered bonds from countries that are part of a reform programme could be part of the purchase programme. We fully adopted those requirements, including 25% committed overcollateralisation (OC). In a greatly disappointing move, the ECB changed its decision a couple of weeks after our 2017 issuance. It was devastating as NBG not only followed the ECB’s guidelines but adopted EBA’s recommendation on pass-through structures, such as the cross-default in case of extension (cross-default, thus no conditionality). That was an unfair decision as we have committed to high OC levels that no investor other than the ECB required.

The covered bond is a prime product. What makes it prime is the security it provides. Data and asset selection are of unparalleled importance for maintaining credibility. The second factor in its value is the protection of investors’ capital. That relies on the real estate and banking conditions of each country. How do you tackle that risk? Through the structure. Other countries may be able to absorb one-off liquidations of mortgage portfolios (although this is untested) and others safeguard capital by the amortisation of loans (in pass-through structures). I feel that as the covered bond market has become more commoditised, we have forgotten the nature of the product and what its real value is.

The CBR: How is implementation of the covered bond directive progressing?

Kotsiras, NBG: Hopefully, through harmonisation, we will be able to amend our programme accordingly so as to be able to participate in the purchase programme while in parallel offering the safest structure to our investors. In Greece, we are working closely with the Bank of Greece to adopt the new directive as soon as possible.

The CBR: You recently published a green bond framework, which I understand is the first from a Greek bank. What is the motivation for this?

Kotsiras, NBG: The target of our issuance strategy is to act as a European bank. The green bond market is growing rapidly and we feel compelled to join it, as Greek banks have provided lending to the rapidly growing green energy sector, which is booming in Greece due to the exceptional climate conditions. We feel we need to do more. NBG wants to be the energy bank in Greece, and expanding our lending is linked to our green framework. Covered bonds will most probably not be the first instrument with that label as the relevant mortgage demand is still weak in Greece. Our green rating from MSCI is BBB and we expect to achieve further expansion of our investor base towards more long term investors.

This article is published alongside a Q&A with National Bank of Greece in light of the postponement of the Athens ECBC plenary.

The Greek economy entered 2020 with positive medium term prospects, being in a trajectory of economic recovery after a multi-year recession that cost more than one-quarter of the economy’s output.

In 2019, for a third year in a row, real GDP grew, by 1.9%, overshooting the Eurozone by 0.7 percentage points. In January 2020 the unemployment rate fell to 16.4% of the labour force, reaching a 106 month low (a peak of 27.5% was recorded in 2013), with employment having recovered 36% of its total losses during the crisis, based on tourism, trade, manufacturing and the public sector. In addition, inflation remained subdued (0.5% in 2019 following 0.8% in 2018), continuing to record favorable price differentials versus euro area trading partners.

At the beginning of 2020, Greek banks had also recorded substantial progress: liquidity conditions had greatly improved, with private sector deposits increasing €8.6bn, or 6.4%, in 2019 and Eurosystem funding reliance returning to normal levels (ELA eliminated since March 2019). At the same time, Greek banks had been outperforming the targets agreed with the Single Supervisory Mechanism on NPE reduction, net credit to non-financial corporations had returned to positive territory, and capital adequacy ratios exceeded those of the average euro area bank.

It is worth noting that in February 2020, the economic climate index recorded its highest value since January 2001! The reductions in the Greek Republic’s borrowing costs, upgrades and positive reviews by the international credit rating agencies, the prospects for accelerating growth in 2020 (the growth rate of the Greek economy was projected at 2.4%, according to European Commission’s winter forecasts), and the commitment of policymakers to implement measures conducive to medium term growth, with a focus on tax cuts and improvements in the institutional framework, have all played an important role in the recovery of Greece’s economic climate. It is nevertheless true that in spite of the significant progress, important risks to the long term potential growth rate remained, due to still negative net investment and adverse demographic trends.

Covid-19 to hit economy, but reforms ‘solid’

The outbreak of the Covid-19 pandemic interrupted this process. In this new context, it is impossible to make an exact forecast for the course of real GDP in Greece in 2020, due to uncertainty related to three critical factors:

● The duration of the lockdown;

● The nature and size of fiscal and monetary support measures;

● The impact on consumer and investor behavior in the post-crisis period.

In that sense, only sensitivities to different conditions can be assessed.

What can be said is that Greece is expected to prove vulnerable to the demand and supply shock caused by the Covid-19 crisis-due to a number of structural factors, including the larger exposure of Greek GDP to tourism and transports and the larger share of self-employed and micro-enterprises in the Greek labour force. Channels of transmission also include disturbances in the supply chain of manufacturing, shocks in consumer and investor confidence, and recession in the country’s major trading partners.

The Greek banks have estimated two scenarios:

In a baseline scenario – based on milder assumptions regarding the duration of the lockdown, fiscal support measures, and assuming no lasting change in consumer and investor behavior post-crisis – the consensus (the average across banks) estimate is for a recession of minus 5.6% year-on-year in 2020 and an increase in the unemployment rate to 19.7% of the labour force;

In the adverse scenario – assuming more extended (or repeated) lockdowns and lasting behavioral changes – the consensus estimate is for a recession of minus 9.9% YoY in 2020 and a gradual recovery from 2021 onwards. In this scenario, an increase of the unemployment rate to 21.2% of the labour force is expected, while recession is also expected to bring about deflationary pressures, and pressures in real estate and in NPEs. At the same time, the primary fiscal balance for 2020 will have a negative sign for the first time since 2013, in spite of the primary surplus of 4.0% of GDP recorded in 2019. This is due to the cost of the fiscal support measures put in place to cushion the negative effects of the Covid-19 outbreak and the effect of the expected recession on budget revenues. Hence, a significant negative impact is expected on 2020 public debt and gross financing needs, with the return of the debt-to-GDP ratio below 100% being pushed forward several years. It has to be noted that the availability of the cash buffer cushions financing pressures.

On the reform front, the effort continues in the context of the enhanced surveillance framework. While some reforms are progressing smoothly, the Covid-19 crisis will inevitably cause delays in both the reform and the privatisation programmes.

Overall, however, the commitment to both programmes by the current government remains solid.

In addition, it is notable that the urgency to provide certain services digitally due to the coronavirus led to the rapid adoption of digital means by both the state and companies and the quick familiarisation with them by the public.

Regarding the reform agenda, of particular interest to the banking sector is the “Hercules” programme for the reduction of NPLs and the new household insolvency framework.

National Bank of Greece (NBG) issuance off its Global Mortgage Covered Bonds programme – including its outstanding benchmark – were upgraded from Ba2 to Baa1, and issuance off its Mortgage Covered Bonds 2 programme from Ba2 to Baa3.

Covered bonds issued off Alpha Bank AE’s two programmes were upgraded from Ba2 to Ba1. Eurobank Ergasias programme 1 covered bonds – including its outstanding benchmark – were lifted from Ba2 to Baa2, and those issued off programme 2 from Ba2 to Ba1.

The Greek country ceiling was lifted from Ba2 to Baa1 in conjunction with an upgrade of the sovereign from B3 to B1 on Friday. NBG, Alpha Bank and Eurobank Ergasias were upgraded on Tuesday, with their counterparty risk assessments (CRAs) being raised from B3 to B2.

“Today’s rating action on Greek banks was primarily driven by the improving economic conditions and more benign operating environment,” said Moody’s. “The revised bank ratings and outlooks also reflect Moody’s expectation for further improvements in banks’ underlying financial fundamentals through lower level of problem loans, increasing customer deposits and gradual enhancement of their weak profitability.

“The rating agency said that the improvement in the operating environment fundamentally translates banks’ financials being more compatible with a higher rating level.”

NBG’s Global programme rating is now constrained by the country ceiling and the Timely Payment Indicator (TPI) of Probable-High. Eurobank Ergasias’s programme 1 could achieve a Baa1 rating under the TPI framework, but the “committed” overcollateralisation (OC) is only consistent with a Baa2 covered bond rating, Moody’s said.

The rating of NBG programme 2 covered bonds is constrained by their TPI of Probable, and the other three programmes’ ratings are constrained by their TPIs of Very Improbable.

Moody’s also upgraded Alpha Bank Romania yesterday, lifting its deposit ratings from Ba3 to Ba2, on the back of the upgrade of parent Alpha Bank AE. Its CRA was raised from Ba2 to Ba1.

The rating agency said it had incorporated into its analysis a planned EUR200m covered bond that Alpha Bank Romania expects to complete in the first half of the year, noting that the secured funding did not prevent the bank enjoying a two notch uplift from its new BCA to the deposit ratings.

The bank in December announced its plans for what is expected to be the first Romanian covered bond.

Alpha’s was one of four Greek programmes put on Rating Watch Positive (RWP) on 22 August following an improvement in Greece’s country ceiling, and on 18 October Fitch concluded its rating action on the other three in question, comprising National Bank of Greece and Piraeus covered bonds. It did so after publishing asset assumptions for Greek residential mortgage loans and refinancing spread levels up to the BBB- country ceiling.

Upgrading Alpha’s covered bonds a week later, Fitch noted that the rating action was different than the original rating committee outcome, with the issuer having appealed and provided additional information to the rating agency.

Fitch and Alpha declined to comment further on the reason why the rating action was different than the original rating committee outcome.

According to Fitch, Alpha will start maintaining committed overcollateralisation (OC) of 27% from the calculation period ending on 31 October (Wednesday), which will be included in the November investor report. This is a change from that previously committed to by Alpha, of 25%, which was in line with the level of other Greek programmes and also that required by the European Central Bank for CBPP3-eligibility.

Fitch said the relied-upon OC provides more protection than the BB+ breakeven OC of 26.5% and is sufficient to withstand stresses at the B+ tested rating on a probability of default (PD) basis. It assigned full recovery uplift of three notches, as the relied-upon OC offsets the credit loss at the covered bonds’ rating, it added.

On Friday Fitch put Bank of Cyprus mortgage covered bonds’ BBB+ rating on Rating Watch Positive. The move follows an upgrade of Cyprus to BBB- and an increase in the country ceiling to A. Fitch said it will review and set asset and cashflow assumptions for the analysis of Cypriot residential mortgage loans up to the revised country ceiling.

The rating agency upgraded Greece from B to BB- on 10 August, with the country ceiling rising to BBB-, and on 22 August Fitch placed four Greek covered bond programmes on Rating Watch Positive.

Reviews of the National Bank of Greece (NBG) and Piraeus programmes were concluded following the publication of asset assumptions for Greek residential mortgage loans and refinancing spread levels up to the BBB- country ceiling, Fitch said.

The NBG II programme was upgraded from BB- to BBB- and Piraeus’s covered bonds from BB- to BB. Another NBG programme, NBG I, was affirmed at BB-.

NBG I’s rating is constrained by a 25% overcollateralisation (OC) level Fitch relies upon offering insufficient protection to withstand stresses for rating scenarios higher than a B rating floor on a probability of default (PD) basis. The 25% OC level is sufficient for the new ratings of NBG II and Piraeus in this respect.

Fitch noted that NBG II and Piraeus benefit from a full three notches of recovery uplift, with the relied-upon OC offsetting credit losses at the respective covered bonds ratings. However, NBG I has only been assigned a two-notch recovery uplift due to a larger credit loss, also taking into account an asset transfer that occurred in August, which increased the proportion of restructured loans from 16.3% to 24.8%, according to Fitch.

NBG’s issuer default rating is CCC+ and Piraeus’s CCC at Fitch.

S&P yesterday assigned a BBB- rating to a conditional pass-through covered bond programme of Eurobank Ergasias (Programme III).

The covered bonds’ rating is delinked from that of the issuer’s jurisdiction-supported rating level thanks to their conditional pass-through structure, and under S&P’s methodology can be up to four notches above the sovereign rating (B+).

An analyst noted that the BBB- S&P rating should make the Eurobank CPT covered bonds ECB repo-eligible, with a 50% risk weighting and potential LCR Level 2B eligibility. He said NBG II covered bonds should now be eligible for certain indices that require the middle rating to be investment grade (they are also rated Ba2 by Moody’s and BBB- by S&P).

When S&P assigned NBG II the BBB- rating in July, it was the first investment grade rating for a Greek covered bond since 2011.

On Thursday of last week Intesa Sanpaolo issued the first Italian senior unsecured bond since April and the first since Italian debt was hit hard by political uncertainties in the wake of its general election. It printed a EUR1bn seven year deal that attracted more than EUR1.7bn of orders.

Bankers said the issuer’s timing was wise, getting its deal done ahead of a potential renewal of volatility in the coming weeks, with Fitch to review Italy’s sovereign rating today (Friday) and the government set to update its deficit and growth forecasts on 27 September, while investors look ahead with uncertainty to the unveiling of the Italian government’s 2019 budget, due by 15 October.

Intesa Sanpaolo had earlier, on 4 June, reopened the Italian covered bond market, which had remained dormant after May’s political instability. While Intesa’s EUR1bn seven year reopener was well received, attracting demand of over EUR1.5bn, shorter-dated trades that followed from Mediobanca, BPER and Banco BPM paid successively wider spreads and attracted much less demand.

This Wednesday, Spain’s Banco de Sabadell launched the latest peripheral deal, printing a EUR750m long five year senior preferred on the back of EUR1bn of orders.

No benchmark covered bonds have emerged from the periphery since Banco BPM rounded off the wave of Italian supply on 18 July.

Syndicate bankers said peripheral covered bond issuance will remain limited for as long as peripheral issuers can continue to access the senior unsecured market continues at reasonable spread levels.

“As long as the market is open for unsecured funding, it makes sense for these issuers to focus on filling their MREL needs or building up additional loss-absorbing capacity,” said one. “Therefore I think we will not see a lot of covered bond supply from southern Europe, where for some issuers available covered bond collateral is limited anyway.

“We must wait and see how well the market can absorb these deals in unsecured format.”

However, at least two peripheral issuers are said to be considering potential covered bond issuances.

“There are not many, but there are at least two deals from southern Europe that are likely to materialise,” said a syndicate banker. “There is a question mark over whether these are for immediate execution, but they are likely to emerge at some point in September.”

Syndicate bankers said the covered bond market could in September still represent an attractive option for non-top tier issuers or issuers from countries where senior unsecured issuance would prove challenging.

When upgrading the Greek sovereign from B to BB- on 10 August, Fitch revised the Greek country ceiling from BB- to BBB-.

The country ceiling had constrained the ratings of the two NBG covered bond programmes that Fitch rates – a soft bullet programme and a conditional pass-through (CPT) – and Alpha’s soft bullet programme, and after the country ceiling was raised market participants and analysts said upgrades to investment grade could be within reach for the three programmes. Piraeus’s programme was seen as potentially missing out on the basis of having insufficient overcollateralisation to reach a higher rating.

Yesterday, Fitch placed the four programmes on RWP, citing the upgrade of the sovereign and the revision of the country ceiling. It will resolve the RWPs upon the publication of new assumptions for Greek residential mortgages up to the BBB- rating scenario, which is the new maximum rating achievable for Fitch-rated Greek covered bonds.

All else being equal, each covered bond programme could be upgraded to BBB- if the 25% contractual OC is enough to support timely payments above the rating floor of each programme, which are B for Alpha and NBG, and B- for Piraeus.

“This outcome would imply that Fitch will start factoring a number of notches represented by each programme’s Payment Continuity Uplift (PCU), as the programmes benefit from dedicated liquidity arrangements designed to mitigate cashflow stresses upon issuer default,” said the rating agency.

As the banks’ IDRs remain at Restricted Default (RD), Fitch uses the corresponding VR as the starting point for its covered bond rating analysis – these are ccc+ for Alpha and NBG, and ccc for Piraeus. The programmes have an unchanged IDR uplift of two notches over the corresponding VR.

For Alpha and NBG, upgrades to BB are possible if the 25% contractual OC is sufficient to mitigate the corresponding credit losses in a BB rating scenario, said the rating agency.

At present, the estimated credit losses under a BB- stress scenario are 8.2% for Alpha, 20.3% for NBG’s soft bullet programme, and 6.5% for NBG’s CPT programme.

NBG was on 6 July assigned the first investment grade rating of a Greek issue since 2011, a new BBB- from S&P for its CPT programme, off which it issued a EUR750m three year deal that reopened the market.