OP disappoints amid pulled deals as investors resist levels

Nov 28th, 2014

The recent CBPP3-inspired momentum of the covered bond market appeared to have dried up over the past week, with demand for a Eu1bn 10 year OP Mortgage Bank benchmark last Friday (21 November) falling short of expectations amid other senior and covered bond issues being pulled.

OP-Pohjola_HQ_January_31_2009-300Senior deals for ASR of the Netherlands and Santander Consumer Bank of Norway were pulled ahead of the Finnish bank’s benchmark, while Nomura withdrew from a senior sterling issue on Monday and AIB Mortgage Bank postponed a covered bond on Wednesday.

On Friday leads Barclays, Credit Suisse, Pohjola and RBS priced OP Mortgage Bank’s 10 year covered bond issue at 4bp over mid-swaps — the middle of IPTs and guidance. Almost all other benchmarks launched since the start of the ECB’s third covered bond purchase programme have been priced from 2bp to 5bp through IPTs.

Syndicate officials away from the deal also pointed to a last update from the leads that books were approaching Eu1bn as signalling weak demand, even if further interest is understood to have come in after that. Distribution statistics included a 42% figure for allocations to central banks and official institutions and the same share for the Nordics, with any Eurosystem CBPP3 purchases likely channelled through the Bank of Finland.

“This transaction was an early sign of the limited private sector demand at these absolute yield levels, having failed to tighten from IPTs,” said Robert Chambers, FIG syndicate manager at Crédit Agricole CIB. “Whilst the ECB demand is likely to be present for most Eurozone transactions, issuers have to offer a premium in order to attract the institutional investors required to clear the remainder of the deal.

“This is exacerbated as we approach year-end, with investors trying to protect their profits and only willing to buy new issues that have the potential for secondary market performance.”

When Nordea Bank Finland on 29 October launched the first CBPP3-eligible new issue after the programme began it attracted Eu3.7bn of demand for a Eu1bn 10 year deal and was priced at 1bp over mid-swaps.

“My personal view is that people are just fed up with this central bank-only business,” said a syndicate official away from the leads. “At the start of CBPP3 people felt everything would grind tighter on the back of the ECB, but everything has already ground tighter, and there is no fantasy left.”

Lauri Iloniemi, head of group funding at OP-Pohjola, said that market conditions on Friday had turned out to be less favourable than expected.

“We saw some investors last week on a roadshow and the feedback we got was very assuring,” he said. “But the day did not turn out not to be the best and we did not see as much demand as we had expected.

“There were several factors, but the main one was the fact that the swap rate was under 1%. For many investors it is hard to go below the 1% level.”

He said that when considering the deal on Thursday the 10 year swap rate had been in the 1.045%-1.050% area, but that on Friday it was down to 0.985%.

“It doesn’t seem like a lot, but 6bp-7bp out of 100bp is quite a bit percentage-wise,” said Iloniemi. “With these very low levels that we are talking about, even these basis points become very, very important.”

Syndicate officials involved in a Eu250m 10 year Pfandbrief for Sparkasse Hannover that followed this Wednesday also cited the sub-1% coupon on that issue as having constrained demand.

Iloniemi nevertheless said that there were positives to be taken away from the Finnish bank’s transaction.

“We managed to price our Eu1bn and get a deal with very high quality investors,” he said. “And we were able to do so at 4bp, which isn’t a bad level at all — our last issue was a five year at plus 5bp.”

That was a Eu1bn issue in early June.

The deal was sized at Eu1bn to maintain OP’s track record of Eu1bn-Eu1.25bn issue sizes, according to Iloniemi.

“I was pretty sure that it was doable,” he added, “and then if you look forward to next week, for example, who knows where the market is then? And it had been considered likely that there would be more supply.”

The new issue was launched to coincide with the maturity of a Eu1.25bn OP covered bond issue on 19 November.

“We were under no pressure to do a deal, but we usually replace our maturing bonds either immediately or shortly after they have matured,” said Iloniemi.

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