Covered Bond Wrap: Market revels in Santander success; bankers lobby for more

Covered bond syndicate bankers are pushing for Spanish issuers to come to the market in the coming weeks, following the blow-out success of Santander’s three-year transaction that attracted €8bn in orders on Wednesday.

“We’re not being shy about asking issuers to make a move,” said one syndicate official. “There is a lot of demand for Spanish paper and as long as borrowers stay at the short end of the curve, they should find substantial investor appetite.”

BBVA seems like the obvious first choice to follow Santander’s lead. According to a source, as well as a Spanish newspaper report, the bank is considering selling a covered bond in the near future, having released its results today.

However, a spokesman for BBVA explained that a covered bond was not necessarily on the table at the moment. “This is not something we are looking at right now but that could change as early as tomorrow if conditions improved,” he said.

BBVA posted a profit of €3bn in 2011, compared to a Reuters consensus of €3.18bn. The results were impacted by €510m of provisions and a one-off charge due to an adjustment of goodwill.

BBVA says it will easily close its remaining capital shortfall and added that it took up €11bn of ECB funds at the December LTRO.

“Santander’s trade proved that the cash bond markets are on fire”

As for the smaller banks, one issuer said that while the Santander transaction was a good first step, the market still needs to improve further to see transactions from non-national champions.

Bankers heap praise on Santander triumph

As for Santander, the results largely speak for themselves. The deal attracted €8bn of orders from more than 300 accounts and priced 20bp inside initial guidance.

Bankers away from the deal heaped praise on the execution process, the timing and the results of the syndication team’s efforts. One borrowed US President Barack Obama’s famous campaign slogan of “yes we can” to declare that the market is now fully open.

“Santander’s trade proved that the cash bond markets are on fire,” said the banker.

He added that a structural short in Cedulas, a lack of available short-end paper on the back of the LTRO, a low-yield environment and general risk-on mood drove the successful trade.

Santander paid a yield of 3.25%, 2.25% higher than it could have achieved through the LTRO but, according to an issuer at a Spanish bank, ECB reliance is not unlimited and, if a bank has a chance to issue a reasonable level, it must do it.

International success

Almost three-quarters of the paper (73%) was placed outside of Spain, a result similar to that of Italian peer Intesa’s 18-month senior deal, which saw 72% of its allocation going to international investors.

Germany and Austria took the largest share of Santander’s paper with 35%; the UK & Ireland followed with 15%, France took 7%, Benelux 4%, the Nordic countries 4% and others 8%. Domestic accounts took only 27%.

And unlike Santander’s previous transaction, where the lead managers accounted for almost half of the bonds, fund managers took 42%, banks 34%, insurance companies 14%, central banks 9% and others 1%.

“We were bullish from the start about this deal,” said Torsten Elling, co-head of rates syndicate at Barclays Capital, which acted joint lead manager along with Citi, Natixis and Santander..

“Although economically Santander, as all other banks, has access to ECB funding through the LTRO, pricing an eye-catching public Cedulas transaction at the same spread over Bonos as ICO is a great outcome and sends a great signal to the market.”

On Thursday morning, the transaction had tightened in 20bp in the secondary market.

Erste finds demand at long end

Erste Group opened up the market for Austrian issuers with a 10-year €1bn covered bond via Barclays Capital, CA-CIB, Erste itself and UniCredit.

Although the transaction was overshadowed by Santander’s blow-out deal that priced the same day, Erste attracted a EUR2bn order book, with more than 100 accounts participating.

On the back of heightened demand for the deal, the leads were able to price it at the tighter end of guidance, mid-swaps plus 130bp. A new issue premium of around 10bp was added as a concession.

“While this may look cheap, the issuer was keen to get a benchmark transaction done, which they achieved with ease,” said a syndicate banker involved in the deal.

In terms of the distribution, Germany and Austria took the bulk of the distribution, accounting for 80%. The Nordic countries took 6%, France 4%, the UK 2%, Benelux 2% and others 4%.

By account type, fund managers came in with 45%, banks 22%, central banks 17%, insurance companies 15%, corporates 1% and others 1%.

On Thursday morning, the deal has tightened in 2bp in the secondary market.

Erste has been expanding its mortgage cover pool, amounting to €7.7 bn, continuously since 2007 and its covered bonds are rated Aaa by Moody’s. Some 94% of the cover pool assets are originated in Austria.

Franz Hochstrasser, deputy CEO of Erste Group said: “The current Pfandbrief issue is part of our strategy to continue to extend the maturity profile of our funding. Our long-term funding needs are limited and for 2012 we are confident we can cover them with our covered bonds.”

Spanish jump on LM bandwagon, more to follow

Catalunya Banc is set to become the third European bank to launch a discounted buy-back offer of covered bond issues as it seeks to shore up liquidity and regain assets to take to the ECB.

Banks are increasingly turning to liability management on covered bonds, having historically focused on buying back subordinated debt instruments in order to increase their core Tier 1 ratios. In the coming months, the number of LM exercises for covered bonds is set to increase.

The second-tier Spanish bank will be looking to accrue €900m through buying back an amount of 2016 and 2017 covered bond trades that are €1.75bn and €1.5bn in size, respectively.

Bankers involved are expecting investors to jump at the chance to exit a bank that is now rated Baa1 as concerns about second-tier peripheral credits have increased during the course of the past year.

“Investors are essentially being paid to return these bonds and given most will be marking them to market, they will get a decent premium to do so,” said Mauricio Noe, head of covered bond origination at Deutsche Bank, lead manager on the exercise with JP Morgan and Natixis.

Respective fixed cash prices of 93% and 94% are being offered for the bonds, resulting in a cash premium of around four points..

The tender offer expires at 5pm on February 10 and the results are expected to be announced February 13. The expected settlement date is February 16.

Catalunya Bank is thought to be funding the exercise with cash from its balance sheet, which will have grown considerably since the first LTRO exercise.

Last week, Portuguese Banco BPI became the second European bank this year to launch a discounted buy-back offer for a covered bond issue as it seeks to boost its capital ratio, although the skinny premium of 2.5 points is unlikely to lure investors out of their holdings.

The Portuguese bank followed National Bank of Greece, which completed a similar liability management exercise on one covered bond issue and five hybrid Tier 1 securities, which allowed the bank to book a €302m core Tier 1 gain.

At the time of NBG’s LME, bankers expected it to be a one-off, but in the wake of three such exercises the party line appears to have changed.

“I think we are going to see a lot more of these deals being done,” said Noe. “Banks have a lot of liquidity and investors have positions that they will be looking to exit, which has created a perfect situation for LM deals to be done, in particular cash tenders. Furthermore, the exercise is often close to liquidity neutral as the tendered securities can be taken to the LTRO.”