• Covered bonds sold by Greek lenders outperform benchmark
• Notes may see upgrades, fueling demand, Commerzbank says

Greece turned a page on the sovereign debt crisis that exploded eight years ago, exiting a bailout on Aug. 20. Earlier in the month, Fitch Ratings upgraded the country one step to BB- citing improved “general government debt sustainability” and noting that confidence in the banking sector is rising.

Upgrades may follow of Greek covered bonds, which are backed by assets including home loans and considered lower risk, according to Michael Weigerding, an analyst at Commerzbank AG based in Frankfurt. Promotion to investment grade would make them eligible for inclusion in indexes of high-quality debt, thereby fueling demand from a broader base of investors.

They “could benefit from investment mandates that can only invest in investment grade-rated bonds,” Weigerding said.

In July, S&P global Ratings gave a ‘BBB-’ investment grade score to National Bank of Greece’s covered bond program. NBG issued 750 million euros of covered securities in October 2017 and it’s now targeting further ratings hikes.

“We are focusing our efforts on getting another investment-grade rating,” said Vassilis Kotsiras, head of funding solutions and structured finance at NBG. “That could potentially make our covered bonds eligible for the Iboxx index.”

Moody’s Investors Service rates the covered bonds of both National Bank of Greece and Alpha Bank SA at Ba2, two steps into junk but with a positive outlook, which indicates that there could be an upgrade in the next 12 months to 18 months.

“A lot of things will play out in the next few months,” said Nondas Nicolaides, an analyst at Moody’s Investors Service in Limassol, Cyprus.

“It will take some time to see how the government is able to cope with its finances outside the support program, and whether we have any potential political development that could affect the capacity and the ability of the government to raise funds in the international capital markets.”

While Greek covered bonds are coming back onto the radar for pension funds and other investors who can only allocate to lower-risk assets, the banks are unlikely to start issuing unsecured debt soon.

“I think the rational way would be to see the sovereign come to the market with a benchmark transaction, let’s say a 10-year bond, and that be followed by the banks issuing debt, probably secured first and then unsecured,” said Dimitris Nikolos, head of investor relations at Eurobank Ergasias SA.