Covered Bonds Fuel European Debt Sales as Borrowing Costs Fall

Banco Mare Nostrum SA and Australia & New Zealand Banking Group are among lenders selling covered bonds in Europe today as borrowing costs for secured debt decline.

The Spanish savings bank is issuing 500 million euros ($680 million) of five-year notes, joining Portuguese lender Caixa Geral de Depositos SA and La Banque Postale in marketing securities backed by mortgages or public sector loans. The average extra yield investors demand to hold covered bonds instead of government debt fell 55 basis points in the past year to 74 basis points, the narrowest spread since July 2008, according to Bank of America Merrill Lynch index data.

“Covered bonds are expensive for investors but cheaper for issuers and the spread tightening we saw last year that made the bonds attractive for sellers will continue in 2014, albeit to a lesser extent,” said Joost Beaumont, a covered bond analyst at ABN Amro Bank NV in Amsterdam. “Another year of negative net supply and more favorable regulatory treatment than for senior bonds should push spreads even tighter.”

Cheap funding from central banks and regulatory pressure on lenders to trim balance sheets have reduced banks’ needs to go to the market, which means redemptions will exceed issuance for a second year, according to Beaumont. Covered bonds are attractive to investors because they will be exempt from European rules that call on bondholders to help absorb a bank’s losses by having unsecured debt written off, or bailed-in.

Bond Spreads

Banco Mare’s covered bonds will be priced to yield 190 basis points more than the benchmark mid-swap rate, according to a person familiar with the matter. The Madrid-based bank last sold secured debt in July 2012, according to data compiled by Bloomberg.

ANZ Banking Group is selling 1.25 billion euros of 10-year notes to yield 36 basis points more than swaps, another person said. That compares with a spread of 130 basis points the Melbourne-based bank offered on the 10-year bonds it issued in January 2012, data compiled by Bloomberg show.

La Banque Postale, the Paris-based banking unit of France’s postal service, is issuing 750 million euros of 10-year notes at a spread of 28 basis points more than swaps, another person said.

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