Euro covered bond wave takes July near record high

Jul 24th, 2015

A German-heavy wave of euro covered bond supply continued this week as nine benchmarks hit the market, with deals from across jurisdictions finding demand even at low yields and longer tenors, but syndicate officials expect activity to slow next week as summer kicks in.

Drapeaux européens devant le BerlaymontLast week’s reopening of the FIG market saw seven euro covered bonds comfortably absorbed and two senior unsecured deals follow on the back of a positive outcome from Greek negotiations. With the floodgates remaining open this week, covered bond supply peaked on Thursday, with four issuers successfully tapping the market.

This took euro benchmark covered bond supply for the month to Eu12.75bn, making it the second heaviest July in the history of the market, after July 2009, when Eu18.5bn was printed following the launch of the European Central Bank’s first covered bond purchase programme.

Yesterday WL Bank and Deutsche Pfandbriefbank sold Eu500m no-grow issues — the first a seven year issue at 16bp through mid-swaps on the back of Eu1.6bn of orders, and the latter a five year priced at minus 14bp. The UK’s Nationwide Building Society was able to sell a Eu1bn five year issue at 7bp over mid-swaps and Bankinter priced a Eu1bn seven year at 23bp, with order books at Eu2.2bn at the last update.

“We don’t see four deals come together on one day very often,” said a syndicate official away from the supply. “All the deals were perfect. Each had a decent level of oversubscription and obviously investors are still available.”

In particular, syndicate officials noted that the issues from WL Bank and Bankinter showed demand for longer dated paper to be growing.

AIB Mortgage Bank had on Monday led the way with a Eu750m five year issue, which also reopened the market for non-core issuers as the first peripheral euro benchmark since 29 May. Two further issuers from the periphery followed on Tuesday, finding further depth of demand for non-core paper: Banco Popular Español gathered Eu2.3bn of orders for a Eu1.25bn long five year at 37bp over mid-swaps, and Banca Popolare dell’Emilia Romagna sold a twice oversubscribed Eu750m five year

But of the week’s nine deals, four came from Germany. Berlin Hyp on Tuesday sold a Eu500m no-grow three year Pfandbrief at minus 10bp, attracting over Eu1.5bn of orders despite low prevailing yields, with the issue offering a coupon of 0.05%. Furthermore, half of the deal was allocated to accounts outside Germany, the biggest international distribution the issuer has had for a benchmark Pfandbrief.

“We are delighted that, following the issue of our Green Pfandbrief in April, we were once again able to generate strong demand,” said Sven Schukat, head of treasury at Berlin Hyp. “The 50% share of foreign investors signifies a new top rate.

“Even in the current climate of sustained low interest rates, many investors are enthusiastic about our bonds. This shows the importance of intensive customer relations care precisely in such market phases.”

Landesbank Hessen-Thüringen followed Berlin Hyp in venturing away from the five year sweet spot, printing a Eu1bn four year Pfandbrief at minus 15bp that offered a 0.125% coupon, with the books closing at over Eu1.5bn.

“These deals show that German Pfandbriefe are working well in that part of the curve,” said a syndicate official. “It is an interesting opportunity.”

Viet Le, financial institutions and covered bonds syndicate manager at Crédit Agricole CIB, said that the busy week was an encouraging sign.

“It is good to see that accounts are ready to engage again in the primary market and that deals are offering good entry levels for them” he said. “New issue concession remains elevated, but If you put this in the context of the market being completely shut for quite a few weeks, it’s very encouraging to see supply picking up and issuers coming forward at current spreads.”

Further deals from both core and peripheral jurisdictions in the senior and subordinated markets were also successful, Le said.

“Things went well overall,” he said. “In both markets, the approach was to come to the market with attractive new issue concessions, and the response from investors was positive and particularly encouraging for further supply.”

Le said new deals in senior offered new issue premiums of 20bp-25bp, with estimates of around 30bp-35bp in the subordinated market.

“The market is still recovering from Greece, so premiums are elevated, but issuers can proceed and get deals done if they are willing to”

However, despite the positive reception afforded this week’s new issues, syndicate officials forecast activity will now slow as summer kicks in.

“For now, the to-do list should be finished,” said one of the covered bond market. “All the issuers that were on my radar screen have successfully done their deals. One or another may arrive as a late-comer, but the big wave is done.”

Le meanwhile said the market backdrop should stable into next week, as headline risk diminishes and with few economic data points approaching, adding that while activity will likely slow down soon, issuers still have a window to tap the market.

“We are now entering the last week of July, which means the summer will kick in as usual and liquidity is expected to dry up,” he said. “But there are still a few issuers looking at transactions across the capital structure and they will be targeting next week if anything, so we should see a couple more.”

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