National Bank of Greece revealed sizeable untapped demand for Greek secured assets with a landmark Eu750m three year issue on Tuesday that exceeded expectations, its group treasurer told The CBR, saying it is a certainty that other Greek banks will join it in the covered bond market.

The deal was the first benchmark Greek covered bond since the county’s debt crisis and only the second overall, following a Eu1.5bn issue for NBG in 2009 that matured in October 2016.

Although that deal showed covered bonds’ worth – with holders getting their money back while investors in the sovereign suffered losses amid the crisis – NBG’s return was seen as a crucial test of demand for Greek products, being the first public bank bond from the country since 2014.

Vassilis Kavalos, group treasurer at National Bank of Greece, told The CBR that a reduction of the bank’s Emergency Liquidity Assistance (ELA) exposure of some Eu15bn since mid-2015 and a significant increase in interbank repo transactions against correlated assets were “the key developments that allowed us to pursue the return to the capital markets”.

He said the positive conclusion of the second review of the current adjustment programme of the Hellenic Republic and the subsequent issuance of a Eu3bn five year government bond at the end of July made the bank confident that now was the time to make its return.

With the new transaction, NBG aimed to re-establish itself in international capital markets, expand its investor base and diversify its funding sources, said Kavalos.

“Under the current environment and in order to achieve a gradual and sustainable reengagement with the markets, we aimed at offering an instrument outside BRRD’s bail-in perimeter, of low volatility and of proven track record,” he added.

Andrea Montanari, head of DCM for Italy and Greece at UBS –the arranger and dealer of NBG’s programme – said that from a structuring standpoint, NBG’s deal had effectively been 18 months in the making.

The Eu15bn conditional pass-through (CPT) programme out of which the deal was issued had previously only been used for retained purposes, and so was not structured for public issuance. NBG’s Eu1.5bn issue in 2009 was sold out of a Eu10bn soft bullet programme.

“They wanted it to be the programme that gave them the highest chance of success in the market, whenever the deal came,” said Montanari.

He said these considerations drove the choice of a CPT structure over a soft bullet structure. Among the changes made to the programme was an amendment to classify a maturity extension as a payment default and an issuer event, to address concerns that the issuer could trigger the CPTs at their discretion.

“We wanted to make sure it was unambiguously clear to everyone that there was no optionality for the issuer to let the covered bond go in the future, because the consequences are strong and dire,” said Montanari. “Investors have appreciated this.”

Although NBG’s existing retained bonds have an investor put option – whereby investors can sell back bonds to the issuer after the bond’s maturity date – the new issue does not.

Following the updates to its programme, NBG announced a series of institutional investor meetings across Europe to market a euro benchmark three year issue, with the roadshow concluding on Monday.

“The biggest challenge was to present our case convincingly, through targeted and extended roadshows, to the investment community, and especially to certain key accounts who were standing on the sidelines for the last few years,” said Kavalos.

He said discussions with investors took in, among other topics, the funding and capital position of the bank, the robustness of the CPT structure of the offering, as well as the quality and characteristics of the cover pool.

NBG has committed to overcollateralisation of 25%, which is a requirement for sub-investment grade Greek programmes to be eligible for CBPP3.

“Fulfilling CBPP3 eligibility criteria was our main target,” said Kavalos. “Therefore we secured the higher level of OC, along with all other requirements, and also we tried vigorously to be given the opportunity to present our case accordingly.”

The B3/B rated deal was launched on Tuesday morning with initial price thoughts of the 3.25% area. Around one-and-a-half hours later, the leads announced that books had exceeded Eu1.25bn, excluding joint lead manager interest.

Guidance was subsequently set at 3.00% plus or minus 10bp, will price within range, and the size at Eu750m, on the back of over Eu2bn of orders, excluding joint lead manager interest. The deal was ultimately re-offered at 2.90%.

“Not only did the final size of the order book exceed by far our expectations, but also, we were positively surprised by the increased participation of German and Italian investors,” said Kavalos.

Asset managers were allocated 56% of the deal, banks 17%, hedge funds 14%, and central banks and official institutions 11%. Accounts in the UK and Ireland took 46%, Germany, Austria and Switzerland 15%, Greece 14%, Italy 14%, the Nordics 6%, and other Europe 5%.

Bankers noted that, as the deal was the first publicly distributed non-investment grade covered bond benchmark, the share of the deal allocated to asset managers and buyers that would not typically feature in covered bond books was particularly high.

“As this was a reentry for a Greek bank into the capital markets, you had to make sure you spoke to all investors and all people on the sales floor, to enter into high yields funds, special situation funds and total return funds, down to the traditional covered bond investors,” said Armin Peter, global head of debt syndicate at UBS.

Kavalos said the issuer and its leads chose the IPT level based on the spread of comparable peripheral issues versus their underlying sovereigns.

“Our starting reference point was a spread in the area of 60bp through the Greek government bond curve, as guided by the comparable periphery issues,” he said. “After books opened, this approach created its own dynamic, based on the solid demand and the limited price sensitivity, resulting in a final spread of close to 90bp through.”

Greece April 2019 bonds were seen trading at 3.1%-3.2% and the recent August 2022s around 4.6% on Tuesday.

Peter said the pricing was “a great outcome” that was justified by the credit quality of NBG’s covered bonds.

“A combination of convincing investors of the structure of the covered bond, making them understand the credit benefits and advantages vis-à-vis an investment in the government, and the outright yield level are probably those points that scored most importantly,” he said.

After NBG’s debut in 2009, Greek covered bonds were used solely for repo purposes. Bankers said the leftover demand for the new issue offers encouragement for an expansion of the market.

“Greek banks are well into the process of normalising their funding sources and disengaging from ELA support, on which they have been reliant for several years,” said Kavalos. “The success of our transaction has identified a sizable untapped demand for Greek secured assets, which will certainly support future efforts to further increase market funding.”

Kavalos said NBG aims to further capitalize on the positive momentum generated by the deal with “similar actions” in the future, and said it is a certainty that other issuers will join it in issuing covered bonds, “as, at this point in time, covered bonds offer to the Greek banks the fastest and most cost-effective way to international capital markets”.

Related investor reports with cover pool information

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