European covered bond bankers had been looking forward to some good news, and last week's debut Australian covered bonds — five year deals from ANZ and Westpac —promised to be a great story. But a combination of bad advice and sheer stubbornness has left the market in tatters.
Both deals have been shot down in flames, effectively shutting the door for other covered bond dollar issuers. And not just in Australia, but Europe and Canada too.
Having resisted for the last decade, the Australian Prudential Regulatory Authority finally gave its blessing to covered bonds last year. Lawmakers put together one of the strongest legislative frameworks in the world allowing the country's local banks, with some of the strongest credit ratings in the world, to access the covered bond market. The fact that the Australian economy was so far removed from Europe was the icing on the cake.
So what went wrong?
ANZ, which originally mandated itself along with Citi and UBS, benefited from first mover advantage. The deal was oversubscribed and got a broad distribution. But the fact that Nomura was brought into the syndicate minutes before launch, and that books opened when Asia was nearly closed, hinted that all was not right.
On top of that, the deal traded 5bp wider just one day after launch. That should have been seen as a clear indication that conditions were far from ideal.
But that didn't put Westpac off. With its joint leads Barclays Capital, Bank of America Merrill Lynch and, again at the last moment, Nomura, the bank decided to push on regardless. Not only was the market weakening, but Westpac had secured the participation of just one of the big US investors that typically take as much as 80% of a deal.
In the face of widening credit indices and a plunging equity market, the leads should have had the sense to advise the borrower to pull the deal — there would have been no shame in this. And as one of the first two deals in a new asset class, the issuer arguably carried some extra responsibility.
The $1bn trade was reported to be oversubscribed, but many bankers claimed that the leads were holding in excess of $200m. Not only that, but the lead order didn't wait long before dumping the deal.
The result was that spreads have widened on both ANZ’s and Westpac’s deals, from the mid swaps 115bp reoffer level to around 130bp-135bp now.
With the four major Australian banks thought to have about A$80bn of non-domestic debt maturing next year — 44% of which is in government guaranteed bonds — they face significant refinancing risk.
But investors don’t forget easily, which means the covered bond debacle will cost Australian banks millions. When markets are fragile, issuers and their advisers need to stop and think, not get caught up in the moment.