Covered Bonds Sales Rising the Most Since 2006: Credit Markets

By Kate Haywood and Bryan Keogh

March 24 (Bloomberg) -- Europe’s banks are selling covered bonds at the fastest pace in four years in a sign investors are
betting the continent’s economy is strong enough to weather the Greek budget crisis. Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 88.7 billion euros ($118.3 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 97.5 billion euros were sold in the same period of 2006. Sales of securities backed by mortgages and public-sector loans are rising as euro-region ministers agree to a framework to bail out Greece. A day after European Central Bank President Jean-Claude Trichet said recent data points to a “moderate recovery,” Germany and France agreed that the International Monetary Fund should be involved in any package for the Mediterranean nation, a German Finance Ministry official said. “This is about a healing in all markets” and banks “are benefiting,” said Daniel Shane, a banker in the debt capital markets group at Morgan Stanley in London. “People are more comfortable holding bank paper and the covered bond market is one of the recipients of that.” The extra yield investors demand to own euro-denominated covered bonds relative to government debt is the lowest in
almost two months at 89 basis points, or 0.89 percentage point, from a high for the year of 100 basis points on Feb. 8, Bank of America Merrill Lynch index data show. The spread narrowed with the euro-region economy poised to grow 1.2 percent this year, after falling 4.1 percent in 2009, according to the median forecast of 16 economists surveyed by Bloomberg.


Portugal Concern
Elsewhere in credit markets, Portugal’s credit grade was cut by Fitch Ratings, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate. The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today. The cost of protecting against losses on Portugal sovereign debt rose to the highest in about a month, according to CMA DataVision prices for credit-default swaps. Five-year contracts rose 3.8 basis points to 137.6 basis points as of 11:53 a.m. in New York, CMA prices show. U.S. corporate credit risk rose, with the Markit CDX North America Investment Grade Index Series 14 index climbing 1.4 basis point to a mid-price of 87.4 basis points as of 12:03 p.m. in New York, according to Markit Group Ltd. The Markit iTraxx
Europe Index, linked to swaps on 125 companies with investment- grade ratings, dropped 0.7 basis point to 78.9, according to Markit’s composite data.


Bondholder Protection
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase indicates deterioration in the perception of credit quality; a decline, the opposite. Wal-Mart Stores Inc. may sell 5-and 30-year notes in a benchmark offering, according to a person familiar with the transaction. The senior notes may be sold as soon as today, said the person, who declined to be identified because terms aren’t set. Benchmark issues are typically at least $500 million. Bentonville, Arkansas-based Wal-Mart last sold dollar- denominated debt in July, issuing $500 million of 6.2 percent bonds due in April 2038 in a reopening, according to data compiled by Bloomberg.


Anheuser-Busch InBev
Anheuser-Busch InBev NV, the world’s largest brewer, may sell debt in a three-part benchmark offering as soon as today,
according to a person familiar with the transaction. Proceeds from the sale, which may occur as soon as today, will be used to repay debt and for general corporate purposes, the person said. The Leuven, Belgium-based company was formed when InBev BV bought Anheuser-Busch Cos. for $52 billion in 2008. Bill Gross, manager of the world’s biggest mutual fund at Pacific Investment Management Co., said that health-care reform will add to, rather than subtract from, U.S. deficits and unfunded liabilities. “Long-term bond holders beware,” Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pimco’s Web site today. “No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer. It will add $562 billion to the deficit over the next decade.”

Covered Bond Spreads
President Barack Obama signed into law yesterday a $940 billion rewrite of U.S. health-care policy that the Congressional Budget Office said would cut the federal deficit. The measure will cut the deficit by $138 billion in the first decade and reduce the shortfall further in the next 10 years, the nonpartisan budget office said in a report last week. Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression. The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 23, compared with an average 92 basis points since 1997, index data show.


Credit Market Seizure
Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008 from a record-high 347.8 billion euros in 2007,
according to data compiled by Bloomberg. The tightening of spreads and pick-up in issuance since then are “reaffirming confidence in the covered bond asset class and that covered bonds are vital to the economic recovery in the eurozone,” said Ted Lord, head of covered bonds at Barclays Capital in Frankfurt. “Recovery can only really happen if you have well-functioning refinancing mechanisms for mortgages and public-sector infrastructure,” he said. Europe’s economy is improving after emerging from the worst slump in more than six decades in the third quarter of 2009, according to the EU’s statistics office in Luxembourg. The default rate on speculative-grade bonds in Europe will drop to 1.7 percent by December from 9.7 percent last month, according to Moody’s Investors Service. New York-based Moody’s expects the rate to climb to 2 percent by February 2011. “Confidence has improved and people are happier to buy bank debt and take exposure to the real estate sector,” said Frank Will, a covered bond analyst at Royal Bank of Scotland Group Plc in London.


La Caixa
Caja Ahorros Barcelona, also known as La Caixa, raised 1 billion euros from a sale of six-year covered bonds on March 22,
Bloomberg data show. The notes were priced to yield 90 basis points more than the benchmark mid-swap rate. Westdeutsche Immobilienbank, a unit of WestLB, sold 500 million euros of the bonds at a spread of 18 basis points over swaps March 22. Banco Popular Espanol SA, Spain’s third-biggest lender, sold 1 billion euros of eight-year covered bonds yesterday, according to Bloomberg data. Swedish Covered Bond Corp., a subsidiary of Stockholm-based mortgage lender SBAB that was incorporated to issue the securities, raised 1 billion euros today from a sale of seven-year notes. Deutsche Postbank AG, the German retail lender, plans to sell 1 billion euros of 10-year covered bonds this week that may be yield in the low-20s basis points over swaps, according to a banker with knowledge of the matter.