The huge US sales beat, in absolute terms, those achieved by any triple-A sovereign, supranational or agency issuer except the US agencies.
This achievement blew away any scepticism that had surrounded the 76% US distribution HBOS claimed for its $2bn five year covered bond in November.
"The first deal opened up the US market and this deal confirms that there is a deep market for covered bonds in the US," said Robert Plehn, head of securitisation and covered bonds at HBOS in London. "The knowledge base and the amount of interest from US investors was much greater than the first issue and we saw a lot of new accounts involved.
"Even going from 19 to 30 US investors would have been a successful development, but we ended up with 50 US investors in the book, including several state pension funds, and orders ranging from less than $1m to more than $500m."
HBOS's follow-up dollar deal, led by Citigroup, Deutsche Bank and Morgan Stanley, had been eagerly awaited by European covered bond issuers keen to crack the US market after years of trying. Their hopes had also been raised by the first covered bond for a US issuer, Washington Mutual's Eu4bn two tranche issue in September.
It is probably no accident that the first European covered bond issuer to really break the US market has a long history of selling billions of dollars of triple-A paper to US investors in the form of mortgage backed securities.
However, while HBOS has unquestionably demonstrated that US investors are eager to buy covered bonds at the right price, the feasibility of dollar issuance for all remains an open question.
Dexia Municipal Agency was forced to widen pricing on a $1bn 10 year public sector-backed obligations foncières issue this week. The deal went from 6bp to 4bp below mid-swaps in the wake of HBOS's pricing at 1bp through mid-swaps, even though Dexia MA's initial pricing had been considered fair and the deal was aimed at Asian and European rather than US accounts.
HBOS built a book of more than $9bn in 24 hours from Monday to Tuesday, which enabled it to price within expectations and size its deal at the top end of the planned range, making it the largest ever covered bond in dollars.
"We weren't certain of pricing and had given indications of the low single digits over mid-swaps, but when we saw the order book we saw we could price at the tight end, at 1bp over," said Plehn.
"We would still have been two times oversubscribed at flat, but some of the big accounts in the US would have dropped out and we felt it was better to leave the extra basis point on the table. Even at 1bp over mid-swaps the execution was still inside where our euro execution would have been."
Although some bankers questioned the arbitrage versus euros, the consensus was that HBOS would have priced a new 10 year euro deal at around 4bp-5bp over mid-swaps. Taking into account a 3.125bp cost for the basis swap from dollars to euros, the pricing in dollars was flat to marginally tighter.
"HBOS has therefore been able to reach a completely new investor base at the same time as achieving competitive funding," said a syndicate official at one of the leads. "There is also every chance that this transaction will trade tighter, as the five year has done."
The five year was this week trading at 4bp through mid-swaps. HBOS's new 10 year traded as tight as 2.5bp through in the aftermarket, before settling at around 1bp through.
Chasing the prestige issuers
This meant that Dexia MA's new $1bn 10 year, led by BNP Paribas, Citigroup and Deutsche Bank, was priced only 3bp through where HBOS was trading — a much tighter differential than exists between the two in euros.
Depfa ACS Bank's October 2015 paper, the only previous 10 year covered bond benchmark in dollars and a public sector issue, was quoted at 10bp through mid-swaps.
"Dexia at minus 6bp didn't look expensive versus secondaries, but dollar investors have only been offered public sector covered bonds before and perhaps more liquid, and Libor-plus mortgage covered bonds will make public sector issues less attractive," said one covered bond banker in London. "That doesn't need to hurt well priced and well executed public sector covered bonds, but whereas they previously benefited from being the cheapest issues in the triple-A space, they are now the second cheapest, and the slippage in Dexia's spread is possibly because of that."
But most bankers expect both issues to tighten and the differential to become closer to that in euros. One pointed out that the differential between HBOS's five year and Depfa's June 2011 paper is 5bp, and that the launch of HBOS's issue at mid-swaps flat in November has not prevented Depfa's paper tightening from minus 7.5bp to minus 9bp since then.
Mortgage backed issuers that trade flat to or at a premium to HBOS, such as other UK banks, Spanish and Dutch credits, are still likely to find dollar issuance most compelling from a pricing perspective.
While most acknowledge that HBOS's powerful market following in the US as an MBS issuer made it an ideal candidate to open up the US investor base, some market participants, particularly on the public sector side, see this as a double-edged sword.
They are concerned that US investors might perceive covered bonds as closer to MBS, particularly if presented with the mortgage product first, and with a structured covered bond that employs securitisation technology.
It remains to be seen whether both the mortgage and public sector instruments can be positioned closer to US agencies, which were trading at 16bp through mid-swaps in 10 years this week.
Neil Day
