Not missing a trick
In a tough year for the covered bond market, and especially tricky for issuers visiting the long end, ING got ahead of the curve in February with a €4bn dual-tranche transaction that comprised €2bn three-year and €2bn 10-year notes.
That longer-dated tranche was the largest euro covered bond with a tenor of at least 10 years since ABN AMRO printed a €2bn 15-year in January 2020. It also boasted the biggest book for such a transaction since January 2021.
The decision to issue a 10-year tranche about a week after the European Central Bank announced its intention to phase out its primary market purchases of covered bonds by March may not have seemed obvious at first glance. In hindsight, it proved to be a masterstroke.
Looking at 2023 as a whole, longer-dated covered bonds became scarcer as the year progressed, with no issuers venturing beyond the six-year mark after August.
The dearth of duration was a consequence of inverted yield curves that kept duration buyers at bay, with the lack of liquidity at the long end exacerbated by the ECB’s withdrawal from the market.
The volume of euro covered bonds with tenors longer than seven years amounted to just €23.5bn in 2023, versus €42.8bn in 2022 and €56.25bn in 2021, according to IFR data.
ING’s February 2033 tranche shines bright against this backdrop, with the Dutch issuer demonstrating perfect timing and making the most of its opportunity by going for size.
Lead managers BayernLB, Danske Bank, DZ Bank, Erste Group, ING, Natixis, Santander and Scotiabank offered the 10-year tranche with initial guidance of mid-swaps plus 23bp area and the three-year tranche at plus 4bp area.
Orders (excluding the leads) settled at €3.2bn for the 10-year, enabling the size to be set at €2bn and the spread at 19bp. That implied a new issue concession of about 4bp.
For the three-year, final orders (excluding the leads) were €4.8bn, supporting a €2bn bond at 2bp through mid-swaps, which was flat to fair value.
The deal rode a surge in interest for covered bonds that, at the time, allowed issuers to generate historically high demand and pricing leverage.
Execution dynamics were the strongest for some time, a momentary shift in sentiment that drove previously circumspect investors to pile into the market, encouraged by strong secondary market performance.
Also at that time, bankers pointed out the repricing that had taken place since the beginning of the year meant covered bonds looked attractive versus the senior preferred bonds of tighter trading issuers.
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