New issue premiums in the benchmark covered bond market increased yesterday (Wednesday) as a record volume of supply hit the market. The previous weekly record was beaten in just three days, as issuance approached Eu15bn.

Syndicate officials were encouraged to see secondary spreads holding up and almost all of the week’s deals being digested, but questioned how long the pace of supply and outstanding levels could be sustained in the face of such high volumes.

Starting the new year with a bang

“So far it has all gone pretty well,” said one, “but it is interesting to see what depth remains. There are still up to 10 deals mandated and waiting to be priced.”

Another said that issuers were taking as much as they could out of the market. 

“This is a disorderly market,” he said. “There is no real oversubscription and new issue premiums are rising. It looks like a very tough market.

“But it had digested about Eu7.5bn by Tuesday evening and another six deals have priced today (Wednesday),” he added, “so that’s pretty impressive stuff in three days.”

Bankers cited several events as reflecting the higher new issue premiums.

A seven year issue for ABN Amro Bank was marketed some 10bp wider than the level at which a deal in the same maturity for Dutch peer ING Bank was sold only a day earlier.

“Normally there would not be such a big difference,” said another syndicate official. “It is an indicator that investors are seeing everything that is being priced. Issuers just have to pay more.”

France’s Crédit Agricole came with a 10 year issue at 73bp over mid-swaps and although this was inside guidance of the 75bp area, it was wider than a 10 year BNP Paribas Home Loan Covered Bonds deal at 65bp on Tuesday.

Norway’s SpareBank 1 Boligkreditt retreated from launching a new issue, but although some market participants said that this reflected the wider spreads in the primary market, a deterioration of the basis swap from euros into Norwegian kroner was cited by the leads. A similar reason was given for Svenska Handelsbanken calling off plans to issue in the dollar market, although a banker suggested that the pricing the Swedish bank had originally been targeting had been ambitious.

Don’t panic! 

A head of covered bonds suggested that issuers were falling over themselves in an attempt to take advantage of coming ahead of competing supply, but that such behaviour only hastened the deterioration in conditions they feared.

“They see more and more mandates on the screen and they panic,” he said. “But there’s no need to panic.”

Another banker said that one funding official who had been relaxed about the timing of his issue on Monday had changed his attitude dramatically after seeing the amount of deals in the pipeline on Tuesday morning.

Bankers said that the wider environment has been supportive of covered bonds.

“Investors are, of course, very busy, but they have put money to work,” said the head of covered bonds. “The point that was made about there being a backlog of cash has proven to be valid.”

Another said that the asset class compared favourably with the senior unsecured market, where bail-in proposals were weighing on sentiment. He said that senior deals for Italy’s Intesa Sanpaolo and Finland’s Pohjola had underwhelmed, with only a conservative Eu2bn two year floating rate note for Société Générale living up to expectations.

“What is clear is that sentiment in the covered bond market, in spite of the supply, is better than in senior unsecured,” he said.

A syndicate banker said that the high quality of the issuers to have opened the market had helped.

“The deals we have worked on have been for pre-eminent names within their jurisdictions,” he said, “and that has been notable of deals so far. It is not surprising that the top names have led the charge.”

The market was reopened on Monday – when some countries were still on holiday – by Germany’s Münchener Hypothekenbank, with a Eu1bn five year Pfandbrief that was priced at 10bp over mid-swaps. One market participant suggested that the issuer will have been happy to have issued ahead of a deal in the same maturity for the European Union, which was yesterday priced wider than Münchener Hyp’s covered bond.

Deals for Banco Bilbao Vizcaya Argentaria and then Santander showed that the best Spanish banks can access the covered bond market, but bankers said that the receptivity of investors to weaker peripheral names was yet to be tested.

“We haven’t seen a caja or a Portuguese name yet,” said one, “and for those guys the market is still pretty tough. Nor have we seen anything Italian – although they should be able to do something if they’re sensible on price.”

Banco Popolare is expected to set the first OBG reference of the year, having mandated for a new issue yesterday.

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