SG, Rabo score successes in impervious covered market

5 min read
EMEA

Societe Generale and Rabobank were flooded with demand for their covered bond offerings on Tuesday, allowing both to print hefty €1.5bn trades without compromising on pricing.

Supported by an imbalance between supply and demand and improved relative value, the covered bond market has seemed impervious to the troubles afflicting markets for unsecured bank bonds over recent days.

Even so, bankers hailed the outcomes achieved by the French and Dutch lenders as highly impressive, in particular the former as it pulled in one of the biggest covered bond books of recent years.

SG offered a five-year green positive impact bond, first shown with initial guidance of mid-swaps plus 2bp area, by ABN AMRO, Danske Bank, ING, LBBW, Santander and Societe Generale.

Demand for the deal, which was announced on Monday, grew rapidly, surpassing €1.5bn within 40 minutes.

The spread was ultimately set at minus 3bp and the size at €1.5bn, with books closing above €4.25bn (including €110m JLM interest).

"They blew it out of the water," said a syndicate banker away from the deal.

Bankers attributed the depth of demand to the deal's five-year tenor – identified as the sweet spot for euro covered bonds after recent swap spreads moves boosted intermediate-dated deals' attractiveness versus SSAs – and the additional interest from ESG-focused investors.

"The tenor combined with the green element was pretty strong," said a banker at one of the leads. "Rabobank also had a strong deal, as there has been a lack of covered bond supply recently. People have realised supply is going to be pretty light, and as we get close to the end of the year a deal like this is attractive to investors."

The depth of demand allowed SG to secure the tightest spread for a non-German euro benchmark covered bond since September 2018, when Credit Agricole priced a €500m four-year at minus 9bp, according to IFR data.

At minus 3bp, the deal was also deemed to have priced 1bp inside fair value, based on SG's curve.

Some bankers away from the deal questioned if a 5bp move from initial guidance to reoffer was too far for a euro covered in the belly of the curve, but the lead noted that Danske Mortgage Bank also tightened a €500m five-year covered by 5bp last week.

"It's arguably what investors expected," he said. "Rabobank moved 4bp with a smaller book, so the size of the book certainly justified it."

Rabo sticks to charted territory

While its move from initial guidance was slightly smaller, bankers said it was impressive that Rabobank also had not had to compromise on either size or price as it too printed a €1.5bn deal.

Tuesday's duo are among the joint largest euro covered bonds of 2021, taking the number of €1.5bn-sized offerings to nine this year.

Rabobank leads Credit Suisse, Deutsche Bank, Natixis, NatWest Markets and Rabobank priced the 10-year deal at 1bp over mid-swaps, inside initial guidance of 5bp area, on more than €2.5bn of orders (excluding JLMs).

A banker at one of Rabobank's leads said the deal had exceeded expectations on the day, with the leads anticipating a 2bp landing after a relatively weak open on Tuesday. He said the outcome was supported by the strength of the Rabobank name and its rarity in covered format, with the new issue its first euro benchmark covered since November 2020.

The deal was priced with 1bp of new issue premium, based on Rabobank's curve.

"Ten-years is not the ultimate sweet spot, hence some ultimate concession was required," said a fourth banker, away from the deal.

"The [rates] rally we've seen probably is not helpful in terms of issuers' desire to be in the 15 to 20-year bucket ... so it is a sensible trade."

Dutch banks tend to favour longer tenors in the covered bond space, as they better match their assets, although Rabobank has more frequently issued around the 10-year mark than some of its peers.

The lead banker noted the 10-year part of the curve had been tested recently by NIBC, which printed a €500m nine-year conditional pass-through covered bond on November 16.

"They were not taking any chances and did not stretch beyond the 10-year mark, where we know investors are able and willing to play," he said.

"[Beyond 10-years] is a step too far, in my view. It is untested territory and the problem becomes that you are very beholden to a limited amount of investors, so if they're not playing, you have high execution risk."