Bank bid helps OP to tight amid pre-ECB covered burst

Attractive market conditions ahead of an ECB meeting today (Thursday) proved tempting for issuers this week as six euro benchmarks over Tuesday and Wednesday made for the busiest two days in covered bonds this year, with Finland’s OP Mortgage Bank coming tightest of the lot.

Banco Santander Totta, Danske Bank and Dexia Kommunalbank Deutschland hit the market on Tuesday after a gap of two weeks since the last euro benchmark (for National Australia Bank on 21 May), before BBVA, OP Mortgage Bank and Yorkshire Building Society priced new issues yesterday (Wednesday).

“Issuers took advantage of a solid but cautious backdrop pre-ECB meeting and US employment figures (due Friday), and they were right to do so,” said Viet Le, financial institutions and covered bond syndicate manager at Crédit Agricole CIB. “No-one knows how the market will look like next week and issuers may well be better off locking in low rates now.

“Technicals — the liquidity situation and lack of supply — continue to support the asset class and borrowers are getting deals done smoothly, paying very small new issue concessions, if any.”

OP was rewarded with the tightest level of all for its Eu1bn five year covered bond yesterday as leads Crédit Agricole CIB, Deutsche Bank, Pohjola, SG and UBS priced the Finnish benchmark at 5bp over mid-swaps. This equals the tightest level for a five year non-German euro benchmark covered bond since the onset of the financial crisis, with only Sweden’s Stadshypotek otherwise having achieved such tight pricing in the maturity, for a Eu1.25bn five year in late March.

OP approached the market after having had its group ratings affirmed by Standard & Poor’s last week, according to Lauri Iloniemi, head of group funding at OP-Pohjola. He said that although he was aware that other deals were due this week, there was little in the way of direct competition.

Iloniemi said that while the ECB meeting today was a part of the equation regarding the choice of timing, it was not a major factor.

“I saw that market conditions were very good and if they are very good before the meeting then why wait and see what they are like after?” he added. “I saw no upside from the ECB meeting.”

OP’s last benchmark was a Eu1bn seven year priced at 14bp over on 10 March and Iloniemi said that the issuer was returning to the market because it had collateral in place and conditions looked attractive, with the impact of covered bonds looking set for favourable treatment in LCRs driving this.

“We wanted to see what type of demand this new regulation would resemble in a shorter maturity, having done a seven year last time,” he said. “It was expected that we would have a lot of participation from banks in this one and that turned out to be true: banks made up 65% of the demand.

“It used to be more so-called real money,” he added. “Of course, absolute yields are so low at the moment that it might take away some of that demand, but bank demand was very, very strong.”

Compared with banks’ 65% share, central banks and agencies were allocated 19%, asset managers 11%, insurance companies and pension funds 3%, and corporates 2%.

Additionally, Iloniemi said that the change in demand played into regional distribution.

“Germany has always been the strongest for us, at 30%-40%, but this time it was important but only at 26%, with Nordics 20% and the Benelux 15%,” he said. “So it was more evenly distributed than previous deals, and I guess that one of the reasons is the bank demand, which explains the higher share to the UK and others.”

The UK was allocated 13%, Switzerland 8%, France 7%, eastern Europe 5%, Asia 4%, and southern Europe 2%,

Iloniemi said that the strength of bank demand was also reflected in the pricing.

“I was pretty sure that we would get a rather good print and I am pretty happy with the result that we got,” he said.

OP’s leads had gone out with initial price thoughts of the high single-digits and after having generated Eu1bn of orders in half an hour they revised guidance to the mid-swaps plus 7bp area and fixed the size as a Eu1bn no-grow. The spread was fixed at 5bp over after demand topped Eu1.5bn.

“Accounts proved very keen as soon as the deal hit screens,” said Le at Crédit Agricole CIB. “As expected, bank treasuries and central banks were very supportive of the deal in light of recent developments on LCR treatment, and absolute tight spreads do not seem to be an issue yet.”

According to a syndicate official at one of the leads, the spread of mid-swaps plus 5bp incorporated no new issue premium.

Iloniemi said that OP may well launch a third benchmark later this year.

“It depends,” he said. “We have a covered bond maturing at the end of the second half and it’s very possible that we may refinance it at that time.”