Tap tap tap – covered bonds on a drip

Posted by Tracy Alloway on Jun 24 11:12.

Hidden in the €144.2bn of euro-denominated covered bonds issued so far this year is a number.


About 13 per cent of total covered bond supply this year came not from new issuance, but from increases in existing benchmark covered bonds. It’s a process called taps, or tap issuance. You’re tapping existing CBs rather than creating and selling new ones. Why would banks do that?, you ask.

In some jurisdictions, like Sweden and Denmark, it’s just de rigueur. But in other European countries, not so much. Sometimes issuers might opportunistically wait for spreads on programmes to tighten and then start tapping. It’s never been without controversy. Plenty of market participants say tap issues can wreck the secondary market in the covered bonds, by lowering prices for the same bond

Here’s Barclays Capital analysts Fritz Engelhard, Michaela Seimen and Jussi Harju:

While the aggregate supply pattern is not particularly surprising, there have been some interesting developments within individual markets. As highlighted in Figure 1, taps had again a particular strong weight in the French covered bond market, where they comprised 21% of this year’s supply. This was followed by the UK (19%), Spain (15%) and the Netherlands (19%).

When looking at the participating lead managers in the individual taps, it is interesting to observe that in most markets the vast majority of taps have been placed with only one lead manager … Only the taps in the German market were all handled by the entire consortium of the initial primary market transaction. … The problem with sole lead transactions is one of transparency. In these cases, regularly the market maker community is only able to gather the information about the increase incidentally, once the deal is settled. Pricing information is generally not disclosed. Consequently, it becomes very difficult to properly price the respective bond in the secondary market. Issuers, who make strong use of taps, may see their whole yield curve trade at a liquidity premium.

The most interesting thing here is that sudden jump in British tap issuance, especially since … it’s actually coming from Spain. Some €2.4bn, or 19 per cent, of UK supply came from taps of Santander UK’s CB programme, Abbey. No other British-issuer did a tappa-tappa-tappa this year, BarCap says.

Here’s a bit more detail:

€1.5bn, or 63% of all taps executed by ABBEY, came through sole lead mandates. Furthermore, the increase of tapping activity in the Spanish covered bond market was driven also by Santander group, which launched €1,045mn of covered bonds via taps, €795mn through Banesto (BANEST) and €250mn through Santander (SANTAN). Again, the vast majority, 83% or €870mn, was basically supplied through sole lead transactions. As in the case of French covered bond issuers, the comparatively strong tapping activity limits the performance potential of the respective covered bonds.

More and more curious.

Related links:
Santander’s €1bn flop – the covered bond that barked – FT Alphaville
The covered bond craze – IndexUniverse

This entry was posted by Tracy Alloway on Friday, June 24th, 2011 at 11:12 and is filed under Capital markets. Tagged with , , , .

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