Caffil success prompts pick-up in covered bond supply

IFR 2366 - 16 Jan 2021 - 22 Jan 2021
6 min read

Supply-starved investors were finally delivered their fill of covered bonds last week, as issuers took confidence from a hit Caffil trade to bring a spectrum of paper.

Only one covered bond issue emerged in the first week of 2021, a €500m seven-year from Aareal Bank, as a dearth of issuance continued from 2020, with banks turning instead to cheap central bank loans for their funding.

But Caffil changed the tone with a €1.5bn trade on Monday that was priced 4bp inside initial guidance at 3bp over mid-swaps, having garnered over €3.25bn from 75 investors.

"It was a rather big deal size for Caffil, which is mainly reliant on covered bonds – we do not issue senior preferred, senior non-preferred or other instruments. It was also the largest book on record for a Caffil 10-year bond," said Sami Gotrane, Caffil's head of treasury and financial markets.

"We had a very good success with large bank treasuries, with roughly 10 lead orders in the books placing very large orders. We have been pleased by the demand and to see the most important bank treasuries in Europe supporting the transaction at a price which is flat from secondary – in line with market conditions for the most liquid covered bonds since last year."

The floodgates then opened on Wednesday, with five covered issues hitting the market.

"Some of these issuers were already eyeing the market at the end of last year but December was not particularly the best month," said a banker. "The Caffil trade, with its book peaking above €3bn, showed issuers that there is a very strong bid for covereds."

Among them was Mediobanca,which achieved a couple of notable highlights with its first mortgage-backed OBG since June 2019 despite having to brave a backdrop of political instability in Italy.

"It is the first ever Italian covered bond with a negative yield [at pricing] and also the lowest spread paid by Mediobanca on a covered bond," a lead manager said. "It was a great achievement despite all the political noise. Yesterday BTPs widened by about 10bp, it is a bit more stable today."

Books opened for the 10-year OBG at 17bp area. With books closing around €1.3bn, Mediobanca was able to print €750m of notes at 13bp, with a reoffer yield of –0.077% and around 70bp inside BTPs.

In spread terms, bankers away from the deal estimated fair value was in the low 10s.

UniCredit Bank AG (HVB) launched a €500m 15-year Hypothekenpfandbrief issue that bankers said was priced 0.5bp–1bp through fair value.

Marketing began at 7bp area for the no-grow trade, with the final spread fixed at 3bp as orders surged past €2.1bn. The reoffer yield was 0.013%.

"To me it makes sense that a name like that delivers in the very long end," a third banker, away from the trade, said.

"Insurers and pension funds still have needs to lock in levels that are with minimally negative or even slightly positive yields. It looked like it was bang on the money from where I'm sitting."

Outside the flow

Jyske Realkredit also managed to price through the curve, selling a €500m October 2027 issue covered with a negative concession of 1bp.

"It is definitely nice to see something that isn't directly supported by the Eurosystem," said a fourth banker.

"The effects from within the eurozone are spilling over to the rest of the world and everyone stands a good chance of profiting from the fact that spreads are disappearing in the ECB zone. The game remains pretty much in the hand of issuers. Good for them, bad for investors."

The long six-year was marketed at plus 10bp area for a no-grow trade. The Danish bank saw orders peak at over €2bn and was able to print at a spread of plus 6bp.

After Wednesday's flurry, further Nordic supply arrived on Thursday from DNB Boligkreditt, with the first green covered benchmark of 2021.

The leads were able to move 4bp from initial guidance to a final spread of 6bp, with the book closing in excess of €3.2bn, enabling the issuer to print €1.5bn.

A lead manager indicated that fair value for a non-green DNB covered issue would be around 7bp and around 6bp for a green one.

“It’s unbelievable, really strong. You couldn’t ask for more,” the lead said.

Lukewarm demand

Muenchener Hypothekenbank rounded off the week with a trade that met lukewarm demand, as books for the tightly priced €500m October 2039 covered bond issue ended up less than twice subscribed.

"MunHyp has this reputation of being stingy and richly priced, which they proved once again. This was not as exuberantly placed as HVB, DNB or Caffil but this is not a surprise, given that this was a pretty expensive trade," the fourth banker said.

The €500m no-grow trade was marketed at 4bp area. Bankers were in agreement on fair value being around plus 1bp. With orders peaking at €1bn, the deal landed on top of fair value at 1bp, offering a minimal positive yield of 0.033%.

However, the tight level led some accounts to drop out and the books ended up in excess of €875m.

“Plus 1bp was the issuer's target, which meant zero new issue premium. The issuer is satisfied and has ended its week on a high note," said the fourth banker.

Away from the single currency, Deutsche Pfandbriefbank sold the first US dollar-denominated covered bonds of the year on Wednesday.

Arranged through Citigroup, Credit Suisse, Goldman Sachs and NatWest Markets, the US$750m three-year Hypothekenpfandbrief issue was priced 3bp tighter than guidance at mid-swaps plus 23bp and drew over US$1.25bn in orders.