Raiffeisen Bank International pulled a 15-year covered bond offering last week in the market's starkest sign yet of investors' change of tack over duration, while evidence of increasing price resistance also emerged.
RBI's failed 15-year – which had been marketed in tandem with an ultimately successful six-year tranche – came after a notable shift in execution dynamics in the covered bond market last week. Market participants cited increasing signs of investor selectiveness and weakness in secondary spreads after a busy start to the year.
Concern centred on the long end, after ABN AMRO and Credit Agricole paid elevated concessions for relatively thinly oversubscribed 15-year and 11-year deals, respectively.
ABN AMRO printed €1bn at 8bp over mid-swaps on the back of more than €1.15bn of orders, while Credit Agricole raised €1.25bn at 5bp on a €1.4bn-plus book.
"Everything beyond 10 years is getting a bit trickier due to the fact that there is more focus on interest rate hikes in the US and yield levels continue to go further up; it’s the reason investors would rather choose more defensive maturities," said a syndicate banker.
One of three issuers tapping the euro covered market on Wednesday, RBI marketed a €500m six-year tranche with guidance of the mid-swaps plus 5bp area and a €250m 15-year at the 15bp area, through Barclays, BNP Paribas, Commerzbank, ING, Mediobanca and RBI.
After around two hours and 15 minutes, the leads announced that books had topped €1bn (including €75m of JLM interest), with demand skewed to the six-year.
Some two hours later, they announced the issuer had chosen not to proceed with the 15-year, while launching the six-year at 2bp on the back of more than €850m of demand (including €75m of JLM interest).
A banker at one of the leads said the level of subscription was not sufficient to give them confidence the 15-year tranche was viable.
"It is predominantly duration based," he said. "You can see how crazily well shorter trades have gone today, but the bid for duration has been getting lower, and it reached a point where we felt it was not right to proceed."
Bankers noted that at 15bp the deal offered a seemingly attractive premium of 7bp–8bp, yet still could not lure investors. Some suggested the deal's size would have been a hindrance, as sub-benchmarks receive less favourable treatment under Liquidity Coverage Ratio rules and are less liquid.
With investors expecting rate hikes and now presented with more opportunities to obtain positive yield, the role of duration is being reassessed across the FIG market.
A head of syndicate suggested that, across different asset classes, longer tenors may now only be open to higher-rated, lower-beta credits.
"Lower-rated credits retain [market] access but you have to shorten duration, simplify the product and also accept that you probably don’t have the pricing dynamics that you typically had," he said.
"If you come to market now with a high-beta credit at the front end of the curve, it would fly. It’s basically perfection. If you say buy high beta longer, I’m not even sure it’s a price discussion. I think people would say: 'I don’t need to take that level of risk to capture what I deem to be a sensible coupon and yield'."
Bankers said the pulled trade is likely to deter other prospective covered bond issuers from tapping the long end.
"Duration is at the end of the tracks for now," said the second banker.
Investors' tenor preference was made plain by the fact that on the same day Bank of Montreal priced a €2.75bn five-year covered issue on the back of a €3.6bn-plus book, taking the record for the largest post-global financial crisis euro covered offering.
However, bankers said those issuers that have been able to get long-dated deals over the line this month are unlikely to regret it, even with concessions elevated, given the likely direction of markets.
"I don't think there will be any issuer remorse around getting duration in early this year," said a fourth banker.
Pfandbrief push-back
Bankers noted that average covered bond premiums edged higher last week, but that mainly reflected the duration of deals such as ABN AMRO's and Credit Agricole's and the sizes taken by the Canadians.
Nevertheless, there have been signs of price sensitivity at the tighter end of the market. An investor push-back was evident in both last week's euro covered bond issues out of Germany.
On Monday, Landesbank Baden-Wuerttemberg was able to tighten its €750m 7.5-year Pfandbrief offering by 5bp from initial guidance to price it at minus 5bp, the tight end of guidance, but saw demand fall by some €650m as a result.
On Wednesday, Muenchener Hypothekenbank followed with a €750m no-grow seven-year Pfandbrief issue offered at the same mid-swaps flat area starting point.
Leads Barclays, DekaBank, DZ Bank, LBBW, Santander and UniCredit subsequently revised guidance to minus 3bp (+/–1bp WPIR) with books exceeding €1.15bn but were unable to tighten further, ultimately fixing the spread at minus 3bp.
"Just two days of difference cost 2bp," said a fifth banker. "It's quite interesting how things are turning on the covered side.”
The final book stood at €940m (including €45m of JLM interest).