The pace of covered bond supply remains brisk with a further four deals in the euro market on Tuesday to follow the four on Monday, with more issuance still to come.
Eurozone-based banks are rushing in before the ECB's Asset Purchase Programme finishes at the end of the month, though financial institutions from other jurisdictions are also seeking funding as some sense of stability has been restored to rates markets.
With so many deals, some clear patterns are emerging with issuers forking out juicy new issue premiums, frequent borrowers able to tighten pricing by about 2bp, but scarcer names struggling to get over the line.
“The [covered] market is oversupplied which is why we have a spread widening. Printing transactions is no longer a no-brainer like in March or April. There are still investors interested in the product but they are no longer keen on that game of trying to tighten by 4bp-5bp,” one banker said.
“As an issuer, you have pay some NIP, pick the right tenor and pick a window that’s not too heavy with supply,” he said. While there was clearly a window on Tuesday, any thoughts of it not being too heavy with supply disappeared quite quickly.
Raiffeisenlandesbank Oberosterreich issued the longest trade of the day, a €500m seven-year mortgage-backed bond.
“Seven-year is sort of a sweet spot in the current yield scenario - it’s not too long, it’s not duration risk, and many investors have a liking for the five to seven-year maturity. So that’s the good thing,” the first banker said.
“What makes it a little difficult is that the five to seven-year [tenor] is oversupplied, especially with Austrian covered bonds – we ‘ve seen about 20 such transactions in the past weeks,” he said.
Just like the 10-year green rail pfandbrief BayernLB launched on Monday, investors were given clarity on where the trade could end up from the get-go.
BayernLB, Helaba, Erste Group, RBI and UniCredit indicated a range of mid-swaps plus 21bp (+/-2bp) for the no-grow trade.
With orders peaking at €875m (including €125m of lead interest), the leads set the final spread at the tight end, leaving an 8bp concession.
“It was a brave undertaking, given that this was a long covered. It did help that it was a benchmark and no-grow. Demand is clearly not what it was like six months ago but it is a strong outcome,” a second banker said.
The book lost a few orders by the end and closed at €840m. Demand was mainly driven by high quality accounts out of Austria and Germany, according to the leads.
Going for size
HSBC SFH France went for size, and it paid a 10bp-11bp new issue premium for a €750m six-year OFH.
“The backdrop is not the best currently but the issuer wished to come to the market earlier than too late. Today was the right window,” a third banker said.
Core Eurozone issuers have been keen to get into the market while the ECB is still a decent presence.
Commerzbank, HSBC, ING, LBBW, Natixis, NordLB and Societe Generale opened books for the benchmark trade at mid-swaps plus 22bp area before landing it at 20bp on the back of an orderbook in excess of €1bn (including €50m of lead interest).
“The general feeling is that investors don’t have that big an appetite. The usual suspects are reducing their order sizes. Nevertheless, they are [present] in the book and this was a success for the issuer,” the third banker said.
Vying for attention
Non-core Eurozone issuers Bank of New Zealand and Virgin Money UK (Clydesdale) were also vying for investors' attention. The latter was unable to move the needle on pricing while the former - a better known name in the covered market - was, like Raiffeisenlandesbank Oberosterreich and HSBC SFH France, able to tighten by 2bp.
BNZ brought a €750m five-year mortgage-backed bond through Deutsche Bank, NAB, Societe Generale and UBS. The leads got over €1bn in orders, after offering a 11bp-13bp premium, according to the lead. The bond priced at 28bp over swaps, from a start of plus 30bp area.
In contrast, Virgin Money ‘s €500m five-year covered bond had some difficulty getting over the line, weighed down by its non-eligibility for the ECB's CBPP3 and what some bankers deemed to a thin new issue concession.
ABN AMRO, BNP Paribas, HSBC and LBBW priced the bond at mid-swaps plus 24bp, in line with IPTs. The order book was just €500m (including €90m of lead interest). Market participants put fair value in a 14bp-17bp range.
A fourth banker said the deal was caught between two stools, with some investors preferring either the more liquid HSBC SFH deal or the more attractive headline spread offered by competing non-eurozone supply from BNZ.
Looking ahead, Hamburg Commercial Bank is gearing up for the launch of a €500m no-grow five-year hypotheken-pfandbrief via ABN AMRO, BNP Paribas, Commerzbank, NordLB and UniCredit.
PKO Bank Hipoteczny is preparing an inaugural euro-denominated three-year green covered bond via Erste Group, LBBW, PKO, Santander and UniCredit.