Greece

Moody’s placed two Greek covered bond programmes on review for downgrade on Wednesday; EFG Eurobank Ergasias’s second covered bond programme and National Bank of Greece’s global covered bond programme, both rated Ba3. The rating agency said the review followed its downgrade of the Greek sovereign on Monday and a review on the issuer ratings.

Peripheral sovereign bonds are once again heading towards their recent widest spread levels but covered bonds, as usual, are lagging the move. Real money buying of peripheral covered bonds has been at levels 60bp through the government in some cases. Volumes are small, however, and bid offer spreads are wide as concerns around volatility continue to weigh in on sentiment.

After digesting the details of a rescue plan for Greece, traders have marked back Spanish and Italian sovereign debt following a brief relief rally on Friday. Secondary market activity was subdued on Monday, and though covered bond spreads have lagged sovereign tightening, making them look relatively cheap, traders said it was never enough to be market moving.

Bank of Cyprus bolstered its available liquidity on Tuesday when it issued and retained €700m of inaugural covered bonds, all of which Moody’s affirmed on the same day as ECB eligible. It is the bank’s first covered bond issue, following the introduction of a Cypriot covered bond law late last year.

A UK based credit investor, who has participated in many of this year’s benchmark covered bond deals, talks to The Cover about the current dilemma facing Europe. He believes that throwing more money at the problem, such as through further EFSF buying, will only provide a temporary solution. Ultimately, there needs to be clear evidence that Europe’s high indebted countries are lowering their deficits. There is every chance that this will take place over the next nine months or so. Both Italy and Spain have made progress and should continue to do so, but the Spanish government is probably in the stronger position. His hopes for Greece remain dim.

Covered bond practitioners say the release of Capital Requirements Directives IV is positive for the sector and broadly similar in outlook to the draft version of Basel III that sealed a structural bank bid for the sector. There have been changes in the way covered bonds are treated by the Liquidity Coverage Ratio, and potentially in the way the Net Stable Funding Ratio is applied. Underlying market sentiment remains negative, as many believe that the sovereign debt crisis is only just beginning.

Though a revision of the Capital Requirements Directives (CRDIV) released today will likely be positive for covered bonds, traders and syndicate bankers are not convinced of any lasting effect on market sentiment. On the contrary, the sovereign debt crisis, they said, can only get worse.

The euro primary market remained closed on Monday. The secondary market, however, has been more active, with liquidity present for both core and peripheral paper. Even Portuguese bonds have enjoyed interest, as fast money accounts salivate over double digit yields.

Fitch became the latest rating agency to downgrade bonds to the border of sub investment grade on Thursday, when it cut the covered bonds of four Greek banks. Its leniency relative to Moody’s, which already rates the covered bonds concerned sub investment grade, means the bonds remain repo eligible.

A senior DCM covered bond banker talks to The Cover about the market outlook for the next six weeks which, aside from the sovereign crisis, will also encompass legislative progress on bank resolution regimes, new developments on CRD 4 and how these might impact the covered bond market.

Investors have plenty of cash to put to work and there is scope for modest issuance next week if stable market conditions prevail but thereafter the funding window is expected to move to late August. In the secondary market, spreads are slightly wider but activity is mostly confined to price checking. Italian auctions went well, breeding a little confidence but overall conditions still remain nervous.

Crédit Mutuel CIC launched its debut Obligations à l'Habitat on Tuesday, taking supply in the new French format since last Friday to Eu3.8bn. The borrower managed to find a secure window for issuance in a market plagued by negative rating actions to print a benchmark deal in line with its own curve, and that of the wider French market.