Portugal

A new world order in debt markets could soon be ushered in with the first covered bond new issue to be priced through domestic government bonds, investors and bankers were forecasting this week.

Amid growing concern over peripheral euro sovereigns, covered bond analysts are focusing on the exposure to the troubled periphery of public sector cover pools in core jurisdictions.

All Portuguese benchmark deals now trade inside government bonds.

After two weeks without benchmark issuance market participants are looking past the UK royal wedding and May Day holiday to a resumption of primary market activity on Tuesday. Syndicate officials were modest in their expectations however as, with peripheral markets effectively closed and some core names in blackout, prospective issuance from for core jurisdictions appears sparse.

Distressed Portuguese and Irish issuers could have the option to postpone the repayment of maturing covered bonds, according to UniCredit analysis, due to ambiguous wording about failure to pay the final redemption amount.

Moody’s cut the covered bond ratings of seven Portuguese banks on Friday following downgrades of the issuers’ senior unsecured ratings on April 6, which followed a downgrade of Portugal’s sovereign debt rating the day before.

Portuguese banks, with Eu13bn of bonds maturing in 2011, are fast approaching the first anniversary since any of their number last sold a benchmark bond, causing consternation among bankers and putting the spotlight on the European Central Bank ahead of a potential tightening in its provision of liquidity.

Landesbank Hessen-Thueringen GZ had the market to itself on Monday, launching its second floating rate covered bond of the year. Though there was a mandate announcement from Caisse de Refinancement de l’Habitat, primary activity has begun to lessen. Nevertheless, names from further afield are on the horizon, with Portuguese national champions watching the market closely and New Zealand’s Westpac expected in the next few days.

The covered bond market is hoping a national champion will soon bring the first Portuguese deal of the year, following the sovereign’s successful bond auction on Tuesday. Elsewhere, Spain’s La Caixa mandated banks for its deal and LBBW is in the market with a dollar benchmark. Meanwhile, the pricing of two German deals on Tuesday went as smoothly as anticipated.

The primary market has slowed to a standstill today, though transactions are in the pipeline and could be due this week — including some new names. In the secondary market, the peripheral sovereign sector has softened but the bid for peripheral covered bonds continues to look well placed.

Moody’s expects negative rating actions on covered bonds to substantially outnumber any positive actions in the year ahead, due principally to weakness in the sovereign and banking sectors.

Fitch today (Thursday) downgraded public sector covered bonds issued by Portugal’s Caixa Geral de Depósitos from AA+ to AA, because the refinancing costs for public sector cover assets are likely to rise in Portugal, based on a review of the sector that it is currently undertaking.