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Keep your options open but your spreads serious

Banco Sabadell was right to approach its possible 10 year covered bond with caution. But if it had been serious about the longer tranche, it would have shown the market a realistic spread.

When markets are whippy, as they have been recently, then sometimes it’s better for issuers that are considering challenging deals to exercise a degree of caution before pulling the trigger and formally launching a deal.

Banco Sabadell did just this on Friday when it announced a five year, and said it was also exploring the possibility of a 10 year.

The last few covered bonds issued by peripheral European banks, such as Caixabank and Bank of Ireland have not had a good reception, even with the support of the European Central Bank.

So, after the volatile swings seen in Bunds lately, smaller borrowers such as Banco Sabadell were well advised not to tempt fate and push another 10 year onto an unwilling market, especially given mark to market pain hurts most in the long end.

However, having this optionality should not be a pretext for trying to get deals priced at wishful levels. If the issuer really was interested in a longer trade, then the spread should reflect that.

Recent 10 year Cédulas issued by Banco Popular Espanol and Bankia trade close to 50bp over mid swaps, so targeting a funding level that’s half that spread looks naïve or ambitious, or possibly both.

Sabadell is a good bank and should trade tighter than most of its peers, but a national champion it is not.

As a national champion, all sorts of investors have lines to BBVA but none for Sabadell, and this has been demonstrated over and over again. Little more than two years ago the borrower only just managed to raise €500m of two year Cédulas at 375bp over mid-swaps, of which two thirds was placed domestically. This came weeks before BBVA raised €2bn of five year money at 260bp and placed the whole lot overseas.

Banco Sabadell was right to not to push ahead with the 10 year as it avoided a bloodbath, but if had really wanted to do a deal it would have been prepared to pay the right price. 

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