Fortune favours the brave
Canadian Imperial Bank of Commerce became the first non-eurozone issuer to sell euro-denominated debt at a negative yield in any sector as it priced a covered bond that, held to maturity, would lose investors money.
You had to look hard to find positive-yielding covered bonds in 2016 as ever greater swaths of the sector sank into negative territory. Whether investors would buy new issues at negative yields was a major point of debate for much of the year, pushing many cautious issuers into ever-longer tenors.
Berlin Hyp was first to cross the negative-yield threshold in the covered bond market. It sold a €500m three-year in March at swaps plus 1bp, equivalent to a yield of minus 0.162%, but with a backstop bid from the European Central Bank, for whose purchase programme the bonds are eligible.
CIBC trumped that milestone as it sold a €1.25bn six-year in July.
“CIBC was the first to price at a negative yield without ECB support,” said Matthias Ebert, a director at Commerzbank, which was a lead manager on the trade alongside CIBC, Danske Bank and HSBC. “It’s very difficult to get a negative-yielding trade without that.”
In fact, the deal was never meant to go negative. The bank opted for a six-year tenor over its five-year sweet spot to avoid just that, but swaps turned against it during execution.
However, investors stuck with CIBC as leads revised initial price thoughts of swaps plus 10bp area and guidance of 7bp area to a final 6bp, equivalent to a yield of –0.009%.
The deal drew more than €2.5bn of orders with a notably high real-money share of 48%, the largest for a Canadian covered for more than two years and overturning fears that that part of the investor base was unwilling to buy at negative yields.
Relative value played a part in the deal’s success, with the return on offer looking generous compared with alternatives despite a new issue concession of just 1bp–2bp. The outcome also reflected assiduous investor work by the issuer and a strong regard for the name.
But pricing at a negative yield was just one feather in CIBC’s cap. The trade was also the first non-ECB purchase programme-eligible issue since the UK’s June referendum on European Union membership, the first-ever six-year Canadian covered and the first-ever Canadian covered carrying a 0% coupon.
“Other issuers afterwards were forced to go to longer tenors,” said Ebert. CIBC was the only mid-tenor euro covered bond issued for three months. “The credit story kept people in the book.”
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