UBS Switzerland and Iccrea found plenty of demand for covered bonds on Tuesday, attracting a combined €12.5bn of orders, and pricing 12bp inside of initial price thoughts — a further sign of just how bullish the market is for senior secured debt, say bankers.
The moves from initial price thoughts, as well as the demand, is a sign of how far the market is rallying, said one syndicate banker involved with the deal.
“A lot of people want to capitalise on the high covered bond spreads. At the moment, it’s bull bull bull — impressive performances,” explained the banker.
“You could argue that these deals could go tighter, but you have to preserve the momentum. After these big moves, the new issues we bring tomorrow might be tighter from the start.
“It’s all a bit of chicken or the egg: if assume all deals will tighten 10bp, you can’t start 5bp back of fair value, as there’s an expectation that you’ll tighten as much as previous trades,” the banker added.
A Swiss peak
UBS Switzerland attracted a stunning €7.4bn peak book, including €745m from leads, for its first covered bond in euros.
“You never know where you’re going to end up with an inaugural deal,” said a second syndicate banker at one of the leads. “When we were talking on Monday evening about where the book should be, nobody expected an outcome like this.”
The Swiss lender was able to use this demand to rein in the spread on its €1bn March 2029 note from the low 60bp area over mid-swaps to 48bp.
The UBS deal came flat to Swiss francs, said the first syndicate banker. “It’s through UK names, like Monday’s TSB, and maybe a couple of basis points north of the Australians or Canadians. It’s also a major chunk below the Japanese banks.”
“We looked at Australian and UK bonds with similar ECB treatment,” said the syndicate banker. “It’s clear a help to boost a trade if you go out with an eyecatcher, like the 60bp area.”
Switzerland is a “little island in the heart of the eurozone” and investors were keen to pick up some of this scarce supply out of the region, said the syndicate banker. “Most eurozone covered bonds are HLQA and LCR eligible, but there’s still a market for paper of this quality, even if it doesn’t fit ECB criteria.”
Commerzbank, Danske Bank, DZ Bank, Helaba, ING, Natixis and UBS’s own investment bank arranged the sale.
Iccrea lands through BTPs
Iccrea Bank attracted a similar level of strong demand as it priced a €500m no-grow March 2032 covered bond off the back of a €5.1bn book, including €205m of lead interest.
“This was an awesome transaction and a blowout well above our initial expectations,” said a DCM head involved with the sale. “At the end, we had almost 140 accounts involved consisting of a good mix of bank treasuries, asset managers, as well as some investors looking for a quick bargain.”
Leads Barclays, Citi, Intesa Sanpaolo, NordLB and Raiffeisen Bank International set the spread on the note at 80bp over mid-swaps, in from initial price thoughts in the 92bp area.
“We saw fair value in the high 80s, so a final spread of 80bp is well inside the issuer’s curve as well as BTPs,” said the DCM head. “Given the absolute spread and yield on offer, this is something that is attracting credit investors.”
“It’s a cracker of a trade,” said one rival banker. “That book is a function of their recent rating upgrade. It’s the second time they are repricing their own curve after their senior preferred deal.”
At the end of January Iccrea issued a €500m six year non-call five senior preferred deal with 5bp-10bp of negative new issue premium, yet it attracted final demand of €3.25bn.
Referring to UniCredit’s “punchy” 10 year senior preferred bullet that landed 10bp through fair value (see separate story), the banker said, “I’m happy that Italian banks are becoming part of the European bank capital markets with well followed and well subscribed deals.”
Later this week, DZ Hyp is expected to bring a €500m no-grow 10 year mortgage covered bond. BMO, BNP Paribas, Commerzbank, DZ Bank, LBBW and Santander are running the deal, which is expected to be priced on Wednesday.
“This is a more established name,” said the first syndicate banker, who is also involved with the DZ Hyp deal. “We’ve had a lot of German supply [at 10 years] from LBBW, Helaba and MunHyp. Pricing will be really interesting, but this isn’t something everybody is after.”