Portugal

Santander Totta will become the first bank to undertake a liability management exercise in which RMBS will be exchanged for a covered bond. The innovative operation offers key advantages for both investors and the issuer, and could become a model for other borrowers, particularly from Spain which has the greatest potential by virtue of its large and well established covered bond and RMBS markets.

Moody’s cut Santander Totta’s covered bonds in line with the Portuguese sovereign’s new rating ceiling, which caps all the country’s covered bonds one notch above junk.

Europe’s peripheral covered bond markets are looking over their shoulders after Fitch downgraded Banco Popular Portugal’s covered bonds on Wednesday. This followed downgrades of Greek and Cypriot covered bonds which have left their issuers unable to access emergency ECB repo funding.

Portugal’s Caixa Geral de Depósitos (CGD) bought €908m of its own covered bonds, representing 29% of the outstanding. This is the second highest take up of a covered bond tender and well above the level that the borrower had aimed for. Millennium BCP’s tender, due next week should have an equally strong result.

Although the technical market backdrop continues to look strong, fundamental concerns lurk just below the surface. In the last 48 hours both Pimco and the prime minister of Luxembourg have raised concerns about the outlook for Greece and the rest of Europe. Against this backdrop, German Pandbriefe cover pools are still exposed to peripheral Europe, latest analysis shows.

The performance of cover pools has deteriorated, Crédit Agricole research has found after examining Moody’s, Standard & Poor’s and Fitch’s data. But this is not because of worsening credit risk but rather because of market risk.

In a flurry of activity that offered another glimpse of the spare cash washing around the European banking sector after the ECB’s first Long Term Refinancing Operation (LTRO) in December, Spain’s CatalunyaCaixa and Banco Popular Español launched tender offers this week, buying back ABS, covered bonds and hybrids.

When National Bank of Greece announced a buyback last month, many market participants felt it would be a one off. But soon after Portugal’s BPI launched its own tender and because that market is slightly bigger, bankers said a handful of issuers might well consider a similar exercise. Now Spain’s Caixabank has followed suit by announcing a tender. Given the large €360bn size of the Cédulas market, it’s fair to assume that the potential for ALM exercises is much greater than had previously been assumed.

Portugal’s Banco BPI launched the second covered bond tender of the year on Thursday and market participants expect more to follow ahead of the second Long Term Refinancing Operation in February.

Portuguese and Irish issuers could follow National Bank of Greece and tender covered bonds ahead of the next ECB Long Term Refinancing Operation in February. Even if participation is half that of NBG’s recent buyback operation, the capital increase could make a compelling argument.

Covered bond spreads have survived sweeping sovereign downgrades by Standard & Poor’s on Friday. Only French issuer Dexia was reported wider on Monday morning, while the LTRO cash injection has ensured short dated Spanish and French paper remains highly sought after.

As a result of deal announcements and the new issue premium, secondary market turnover has been hit, with spreads moving on little volume. Curves have conspicuously steepened in France but DexMA remains out of line.