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Covered bond timing is everything

By Bill Thornhill
01 Oct 2018

The covered bond market has a reputation for allowing tough trades to be done, so when My Money Bank postponed its debut deal, the product was imprudently tarnished. The situation could have been avoided had the deal been launched a week earlier or sometime later — just not last week.

After becoming the first private equity firm to obtain a banking licenxe, the Cerberus-owned My Money Bank’s €500m seven year French covered bond had been eagerly awaited.

But after opening books on Thursday, the deal attracted orders of only €400m and was subsequently postponed. 

Had the issuer moved a week earlier, it would have benefited from the European Central Bank’s support and the deal would likely have got over the finishing line. 

However, the ECB cut its orders from 30% to 10% for all covered bonds settling in October, and My Money Bank just missed the deadline.

Given the enhanced need for maximum credit line availability following the ECB reducing its order size, the lead group — which comprised ABN Amro, BNP ParibasCrédit Agricole and Société Générale — would have been put on the back foot.

Better to wait

Before the order books were opened, several key investors had signalled that they needed more time to get their credit lines in place.

The leads will have certainly relayed this to the issuer and, taking note of a lower bid from the ECB, will have advised My Money Bank to wait.

But with a demand of only €400m, some of the investors that were already in the book realised that the trade was not going to work and withdrew their orders. 

This left the issuer with no option other than to postpone the trade.

Some issuers have a reputation for chipping back fees, leading to speculation that this may have been a motivating factor behind the leads’ decision to walk away from the deal. 

But that was not the case. Had the deal gone ahead, leads would have earned the standard fees.

JLM and issuer interest

A rival banker questioned the wisdom of going out with the €400m book update.

Given that the issuer had said it would retain €50m, the lead group would have only needed to purchase €12.5m apiece to make up the remaining demand. 

With combined orders of €500m, it is possible that investors would have stayed in the book.

It is equally possible these accounts would have seen this additional demand as distorting, and not representative of real investor interest.

The issuer and lead group were ultimately correct in not pressing ahead with the deal and forcing a transaction into the market that was clearly not working.

“Once we realised that the deal wasn’t gaining sufficient traction we decided jointly with the leads to postpone the deal to protect the investors’ interest,” said Fady Wakil, treasurer at My Money Bank. 

“It’s absolutely true that a lot of investors had asked for additional time to get the credit work done, so we will give them this time. We’ll be back once they’ve done this work and when market conditions are appropriate. We are not in a rush given we have strong liquidity — we prefer to take the time, given this is a debut deal and get a clean trade executed.”

By Bill Thornhill
01 Oct 2018