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Banks Cut Funding Costs Through New Year Covered Bond Surge

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Jan. 3 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, and a unit of ING Groep NV started the New Year by selling top-rated covered bonds to cut funding costs while satisfying investor demand for the safest securities.

UBS issued 1.5 billion euros ($2 billion) of five-year bonds at a yield of 61 basis points more than the benchmark swap rate, less than a third of the 187 basis-point spread on its existing senior unsecured notes due in 2017, according to Bloomberg Bond Trader prices. ING Bank NV is issuing 1.75 billion euros of 10-year covered bonds at 110 basis points over swaps, a banker said.

“The re-ignition of the credit markets must come from the ultra-safe issuers first,” said Ivan Comerma, the head of treasury and capital markets at MoraBanc in Andorra. The burst of issuance “may prompt lower-rated issuers to attempt covered bond sales,” he said.

Financial institutions sold a record 367.2 billion euros of the debt last year as Europe’s sovereign crisis worsened, up from 348.8 billion euros in 2010, according to data compiled by Bloomberg. A staple of European bank funding for more than 200 years, covered bonds are considered safer than unsecured debt because they’re backed by mortgages or public-sector loans as well as a guarantee from the issuer.

Post-Christmas

In an otherwise quiet period after the Christmas holidays, banks including Credit Agricole SA and Australia & New Zealand Banking Group Ltd. lined up to hire arrangers last week for deals to start early in 2012. Credit Agricole’s issue may be priced to yield about 165 to 170 basis points more than swaps, a banker said today.

France’s Caisse de Refinancement de l’Habitat SA sold 2 billion euros of covered bonds due in June 2022 today at a spread of 160 basis points, a banker involved in the deal said. National Australia Bank Ltd. mandated an issue, while Commonwealth Bank of Australia hired banks for what would be its first sale of the bonds in euros. Lloyds TSB Bank Plc of the U.K. and Norway’s DNB Boligkreditt AS plan issues tomorrow.

“If there’s investor appetite for anything in the bank space, it’s covered bonds,” said Roger Francis, an analyst at Mizuho Securities Co. Ltd. in London.

The European Central Bank also stoked sales by starting a 40 billion-euro purchase program to support the bank funding market in November.

Meanwhile, Rabobank NV, the world’s highest-rated private lender, hired banks to manage a 10-year senior, unsecured bond issue in euros, according to a banker involved in the deal.

To contact the reporters on this story: Ben Martin in London at bmartin38@bloomberg.net; Hannah Benjamin in London at hbenjamin1@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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