Rabobank proved it is possible to take size at the long end of the covered bond market with a €1bn 20-year transaction, the biggest deal at that tenor in over a year.
Interest in such longer-dated covereds has increased over recent weeks on the back of a rise in yields, prompting a handful of issuers to return to what had been a neglected segment of the market. But, until Thursday's offering, almost all of the recent 15-year and 20-year offerings had been smaller €500m issues.
Leads LBBW, Natixis, NatWest Markets, Rabobank and UBS launched the €1bn deal at 3bp over mid-swaps, after having opened books with guidance of 6bp area.
The deal is the largest euro covered bond with a tenor of 20 years or longer since Rabobank sold another €1bn 20-year last June.
"There have been some questions about the depth of demand when it comes to 15-year and 20-year covered bonds, and recently we've seen order books for De Volksbank and MunHyp all around low-to-mid one billion," said a syndicate banker at one of the leads. "This book is similar but the transaction today has shown that you can allocate sizeable deals in this tenor spectrum, even at relatively low yields."
"The investor base has shrunk over the last six to 12 months in these tenors and we are definitely feeling that in the amount of investors in order books. But what you do have is a strong, constant buyer base - predominantly LCR portfolios, but you do see some insurance companies as well."
Demand for the deal - which offered a marginally positive yield, albeit of just 0.066% - surpassed €1.6bn, including €150m lead manager interest.
"€1.6bn-plus for a 20-year is a very solid subscription for that headline spread," said a syndicate banker away from the leads. "It is a perfectly solid trade, with next to no concession."
The deal extends Rabobank's benchmark covered bond curve by one year. With its 0.75% €1bn June 2039s - its longest benchmark outstanding - quoted at 1bp, mid, bankers saw fair value for the new issue at 2bp-3bp, implying Rabobank paid a 1bp new issue concession at most.
The deal is also the second tightest 20-year euro benchmark covered of the year, behind only a €500m issue from MuenchenerHyp priced at 2bp on October 27.
It comes shortly after another 20-year covered from a Dutch lender. On November 11, De Volksbank sold a €500m 20-year at 7bp over mid-swaps.