IFR Magazine – January 20, 2018

THISûYEAR ûTHEûBPûTHROUGHûMID
SWAPSûlNALû
level offering 2bp of new issue premium.
DNB managed to price the largest non-
CBPP3-eligible trade of the year so far.
That bodes well for the SWEDISH COVERED
BOND CORPORATION (SCBC) which mandated
Barclays, HSBC, LBBW, Nordea and UBS on
Friday for a seven-year euro benchmark
covered bond, expected to be rated Aaa by
Moody’s.
But while non-CBPP3 eligible names
proved a popular choice for investors,
#"00
ELIGIBLEûISSUERSûHADûTOûlGHTûFORûEVERYû
scrap of demand.
h"OOKSûAREûlNEûINûTHEûRESPECTûTHATûTHEûBANKSû
AREûABLEûTOûlLLûTHEIRûDEMAND vûSAIDû$ANIELû
Rauch, portfolio manager and head of covered
bonds research at Union Investments.
“However, there is no blow-out and books
are not that oversubscribed.”
BAYERISCHE LANDESBANK drew over €700m of
demand for a €500m no-grow January 2028
that priced at 15bp through mid-swaps, for
example.
And lack of performance has left investors
underwhelmed.
“Initial spread performance is almost non-
existent - maybe at 1bp,” said Rauch. “The
majority of the paper is not performing.”
Another investor said he expected new
issue premiums to go up from the 3bp on
average that issuers have been paying.

“For the eligible names, spreads are

super tight,” said a senior syndicate

banker.

h)FûYOUûLOOKûATûTHEûlRSTûWEEKûOFûTHEûYEARû

we saw quite a large repricing in SSAs, a

widening of 3bp-5bp. However, covered

bonds haven’t moved at all and especially in

outright terms, they’re expensive versus

SSAs and if there is a market that has been

corseted by the ECB purchase programme,

it’s covered bonds.”

For investors, this means a bit more

caution, especially in the longer end of the

curve.

“I can see why issuers are interested in

putting comparatively long-dated paper into

the market, but it’s a bit more challenging if

you’re an investor and looking at the

horizon which is characterised by increases

INûINmATIONûANDûINTERESTûRATESvûSAIDû#ALVINû

Davies, head of covered bonds and ABS at

NN Investment Partners.

TURNING THE TABLES

A change in covered bond supply and

redemption dynamics is also something that

issuers may have to start to contend with.

“The technicals aren’t that great,” the

senior syndicate banker said.

“You have much lower redemptions in

the space than last year, and even taking

away the risk of the ECB going to zero,

you’re still looking at net positive supply for

THEûlRSTûTIMEûINûAûWHILEv

Year-to-date issuance of €21.25bn has

surpassed the volume of euro benchmark

redemptions since the start of this year by

around €15bn, according to ABN AMRO

analysts.

One issuer that will offer investors a far

more attractive spread than the tighter core

names is ALPHA BANK, the last of the big four

Greek banks to return to the debt capital

markets.

Barclays, Citigroup, Commerzbank, JP Morgan

and NatWest Markets have been mandated for

ANûUPCOMINGûSOFTûBULLETûlVE

YEARûCOVEREDû

expected to be €500m in size.

A Eurobank €500m 2.75% three-year

covered is bid around 2.39% on Tradeweb,

having priced at a yield of 2.98% in October.

The Alpha deal, which is expected to

be rated B3 by Moody’s and B by Fitch,

will follow investor meetings from

January 22-24.

NIBC BRINGS FIRST CPT SINCE ECB

TURNABOUT

NIBC BANKûISûSELLINGûSûlRSTûCONDITIONALû

PASS

THROUGHûCOVEREDûBONDûTHEûlRSTûSUCHû

deal since the European Central Bank said it

would no longer buy CPT structures from

sub-investment-grade issuers.

Real money disdain leaves ECB to do

covered heavy lifting

„ COVERED BONDS Central bank ramps up purchases

Real money investors, deterred by the tight

pricing levels on covered bonds, have shrunk the

size of their orders in the primary market, leaving

the ECB to do the heavy lifting when it comes to

new issues.

Fears that the covered bond market would be

adversely impacted by the ECB’s cut in its asset

purchase programme from €60bn to €30bn

a month have not materialised. Instead, the

central bank has ramped up purchases.

It bought more than €1.6bn in the week to

January 12, which was more than double the

€682m it bought on average between April to

mid-December 2017, according to Citigroup.

“The good news is that obviously the ECB

is not scaling back its appetite,” said one DCM

banker.

For example, 56% of Credit Agricole’s €1.25bn

January 2026s were allocated to central banks.

But while the central bank’s high participation

in the primary market might allay fears about its

commitment to the covered market, it is also a

symptom of real money investors’ reluctance to

buy deals at the such tight levels. This is despite

the fact that issuers are paying bigger new issue

premiums than last year.

“Investors are more price-sensitive and

cautious than central banks, so more [central]

banks are coming in to take their place,” the

DCM banker said.

Central bank purchases have also given

peripheral issuers a helping hand, with 47%

of Banco BPM’s €750m January 2025 debut

covered issue going to monetary authorities or

official institutions.

The 12-year tranche of UBI’s lacklustre two-

parter was also supported heavily by central

banks, which took 47% of the overall allocations.

“Usually, we try to scale back the ECB, so they

get a very average allocation, but I think in some

of the recent deals they had to fill them for the

whole order size,” said another banker.

The importance of the role of the covered

bond programme within the ECB’s QE

programme is still relatively modest, when

comparing it with sovereigns, said the first

banker.

The ECB has bought almost €1.9trn of assets

under its public sector purchase programme

compared with €242bn in covered bonds.

The picture will only change should the ECB

stop its asset purchases completely, potentially

in September, but is expected to remain

unchanged for now.

“We expect them to carry on acting as they do

and I don’t expect this to change,” said a third

banker.

Another reason for the heightened central

bank allocations stems from the overall move of

investors out of covered bonds and into credit

and other asset classes.

“The allocation of private money has

obviously changed and there are other ways to

invest,” said the banker, who also sees these

allocations continuing.

Merle Crichton