ING keeps the covered bond flag flying

4 min read
EMEA

ING Bank showed covered bond pre-funding is still on the table with a €1.5bn 10-year deal on Wednesday that replicated the success of a near-identical trade for compatriot Rabobank last week.

ING is the first financial institution to venture into the euro market since the identification of the new Covid-19 variant Omicron triggered a broad sell-off at the end of last week.

Bankers expect December to be a quiet month for euro FIG supply unless there is a sustained improvement in market conditions. but the covered bond market has been highlighted as a potential exception, with the asset class proving resilient to the widening pressure exerted over unsecured products.

Most tranches of euro FIG debt sold in November have widened from reoffer levels, but covered bonds have continued to perform, supported by a supply versus demand imbalance, strong relative value versus government debt, and European Central Bank purchases.

"It's a defensive asset class, investors in that part of the world are still cash long, and this is the trade to do in a market like this and still expect a good outcome," said a DCM banker away from the deal.

With January expected to be a typically busy month for supply, the still-functioning market offers issuers attractive pre-funding opportunities.

"This was the main driver for ING," said a syndicate banker on the deal. "They can easily take the carry of four weeks and use a clear window now rather than face the crowds in January."

The Dutch lender's deal was marketed with initial guidance of mid-swaps plus 5bp area, via Credit Suisse, Danske Bank, HSBC, ING, LBBW, Nord/LB and UniCredit.

The spread was fixed at 1bp over mid-swaps, leaving a new issue premium of 1bp–2bp.

“Obviously, the volatility and everything else we have seen going on in the markets over the last few days was always going to make you wonder if deals in the covered bond market are still doing well, and I think that was certainly proven today," said a second lead.

"From my point of view, the highlight is that covered bond markets function very well and also function further out the curve.”

ING matched the size and final spread achieved by domestic rival Rabobank with a €1.5bn 10-year covered bond on November 23.

"Traditionally, would there potentially be a basis point or two between them? Possibly yes," said the DCM banker.

"But in this market, where spreads are so tight, it comes down to size and timing. In this case, with ING going with the same trade and the same size in a very similar market to what Rabo had – arguably a slightly weaker one – investors would expect them to price flat to each other."

Bankers noted ING was able to attract a similar level of demand as its peer, with orders coming in at €2.4bn-plus (including €90m JLM interest) versus the €2.5bn-plus book (excluding JLMs) for Rabobank. That represented a good outcome, bankers said, given ING is a more frequent issuer than Rabobank across all formats.

ING and its Dutch peers tend to favour long maturities that better match their assets for their covered bond issuance. In this market, some bankers suggested the 10-year tenor is the longest that covered bond issuers can go without having to substantially pay up. Nevertheless, at least one issuer is said to be eyeing the long end.

"I would say this is it [for 2021], but I would have said this on Monday also," said the first lead banker. "You never know, but I don't foresee a huge chunk of pre-funding.”