Santander sold the first Spanish benchmark covered bond in seven weeks yesterday (Tuesday), a Eu1bn five year cédulas territoriales, but market participants said that it struggled as investors remained hesitant about exposure to Spain in spite of an improvement in market sentiment.

Commerzbank, HSBC, Santander and Société Générale went out with guidance of the 195bp over mid-swaps area and kept books open from around 1115 CET to 1530 CET. They priced the Eu1bn issue at 195bp.

Bankers away from the leads were sceptical about the strength of demand.

“I was surprised at Santander,” said one. “I showed them that pricing, but not that timing.

“Just because one day the indices are trading better, it doesn’t mean that investors are going to wake up and decide that, just having sold Spain, they are going to start buying again. I wouldn’t have recommended going ahead unless I wanted to be left with Eu100m on my book.”

However, a syndicate official at one of the leads stressed that in the market circumstances achieving a Eu1bn size was a positive outcome.

“Santander is the strongest financial institution group in Europe, therefore they had the chance to issue,” he said. “But any other less strong financial out of Spain would struggle to issue.”

But he acknowledged that the deal had to contend with some headwinds.

“It was a bit of a tough trade,” he added. “We were struggling mainly with two arguments from investors. Firstly, the general cautiousness towards peripheral states, which is currently at a very high level.

“And secondly, that the collateral, Spanish public sector collateral, did not get the traction with investors that we had anticipated.”

This was despite the deal coming at a premium to Santander’s cédulas hipotecarias curve, he added.

“There are not many cédulas territoriales comps,” he said, “so we chose the Santander cédulas curve, which was at around 175bp over for a generic five year.

“We worked out a new issue premium of up to 15bp plus 5bp for the collateral difference. Arguably the new issue premium was lower and up to 10bp was for the collateral, but overall it was 5bp-10bp for the collateral.”

A banker away from the leads said that cheaper pricing could have helped demand, but was not surprised that the guidance was stuck to.

“Yes, a wider spread would have made a difference,” he added, “but you don’t suggest to Santander to pay up 20bp.”

According to the leads, banks were allocated 72% of the paper, insurance companies 15%, fund managers 10%, and others 3%. Spain took 30%, Germany and Austria 26%, France 23%, the UK 17%, and others 4%.