Long-dated issuance remains tricky for covered issuers

5 min read
EMEA, Asia
Malicka Danna Sielinou

Moving further out on the curve remains tricky in the covered bond space, as evidenced by the resistance met by DZ Hyp and Credit Agricole on Monday while Lansforsakringar Hypotek attracted more than twofold demand at the short end.

"The day's transactions prove there is cash out there as long as issuers are fair to investors, and deals can get done at reasonable levels," one banker said, adding that short and medium-term trades were more palatable for investors than long-dated ones.

DZ's €750m nine-year Hypothekenpfandbrief was just about subscribed, market participants finding the 4bp new issue premium on offer lacking in generosity.

"Even if you are a very well-liked liquid name, that doesn't necessarily get you the absolute best outcome. This market is tricky for a broad range of issuers," a second banker said.

Commerzbank, Credit Suisse, DZ Bank, LBBW, Natixis and Rabobank initiated price talks at mid-swaps plus 7bp area and set the spread at plus 5bp on the back of the order book peaking at over €1bn. The final tally stood above €860m (including €75m of lead interest).

“I would have expected a little bit more demand at this level but long maturities are not a walk in the park. You cannot [easily] bring a long transaction being a tier two or tier three name, only the strongest names can do that," a third banker said "Credit Agricole with the eight-year also struggled to get enough traction to get a strong trade but at least they managed to tap the market decently."

The French issuer met some resistance during the execution of its €1bn May 2030 OFH.

"Moving 1bp from start to finish is not what I would have determined as the expectation when we started out. But, saying that, the marketplace is very different to what we have seen. There's increased spread sensitivity and book dynamics require more and more that issuers adapt to whatever is pivoting interest," a fourth banker said.

After orders peaked at €1.5bn, Credit Agricole, Danske Bank, Helaba and Swedbank printed the trade at mid-swaps plus 10bp from 11bp area guidance, leaving 5bp on the table. Final books closed north of €1.475bn (including €175m of lead interest).

“The market is getting worse and obviously there has been a lot of supply. [So], first you have to basically play it safe, pick something between five and seven years," a fifth banker said. "Second, if you want to go for size, you need to be a bit more generous in terms of starting points. The supply just doesn’t stop, and what that actually speaks for is increasing the new issue premium at the start a little bit."

This was illustrated by LF Hypotek's €500m five-year non-CBPP3-eligbile sakerstallda obligationer.

“It’s working better because: it’s five-years; there hasn’t been that much supply out of Sweden this year, so there’s a little bit of scarcity value; and the nice double-digit [spread] at the start was attractive to investors,” the fifth banker said.

BNP Paribas, Deutsche Bank, Erste Group, Nordea and Swedbank opened books for the no-grow trade at mid-swaps plus 10bp area and landed at 6bp after orders passed the €1.3bn mark. Final demand was in excess of €1.2bn (including €60m of lead interest).

“The quality of the book is really good. Yes, there is a bit of spread sensitivity, it’s true. But, at the end of the day, we saw investors that had some spread limits adjust. Fair value was in the context of 3bp–4bp,” the fifth banker said.

The covered bond pipeline is teeming with supply as core eurozone issuers seek to tap the space before the ECB possibly reduces the size of its participation bid in June and before new and more strenuous EU regulations on covered bond legislation become effective in July.

Hypo Oberoesterreich is gearing up for the launch of a €250m no-grow seven-year through BayernLB, Deutsche Bank, Erste Group and RBI.

Landesbank Saar is eyeing a €250m no-grow 10-year social public sector Pfandbrief and has picked Helaba, LBBW and UniCredit as lead managers.

A €500m no-grow seven-year soft bullet OBG is also in the works for Credito Emiliano. Barclays, BNP Paribas, Credit Agricole, Natixis and UniCredit have won that mandate.