Commonwealth Bank of Australia sold the first Australian euro benchmark yesterday (Wednesday) and its group treasurer told The Covered Bond Report that the deal’s reception vindicated its decision to tap the European market rather than the US, as did ANZ and Westpac in November.

The issuer priced a Eu1.5bn (A$1.88bn) five year deal at 100bp over mid-swaps, in line with guidance, via leads BNP Paribas, HSBC and RBS. The final order book exceeded Eu1.7bn.

“Clearly market conditions have meant that any access to the markets at the moment is quite expensive, but we really wanted the inaugural Commonwealth Bank of Australia covered bond issue to be very successful,” Lyn Cobley, group treasurer of Commonwealth Bank, told The Covered Bond Report. “My measures of success are that it was widely distributed, it’s of a reasonable size, it has been well accepted by the market, the after-market trading is satisfactory, and we were oversubscribed.

“So from my point of view it was a very well received deal, and we are very pleased. We want to raise A$30bn-A$35bn under this programme and in any programme like this, in what is a new market for us, the euro covered bond market, it was important to ensure it was a success for investors as well as for us as issuer.”

The deal is the Australian bank’s first covered bond, fulfilling a mandate that was publicly announced in October, but prevented from being executed earlier given poor market conditions. ANZ launched the first covered bond from the country, tapping the US dollar market in November, followed by Westpac, but although they may have achieved cheaper funding than was available in euros at the time, the two deals were criticised for underperforming.

Commonwealth Bank building, Sydney

Cobley said that the ultimate execution of the euro benchmark vindicated the issuer’s strategy.

“After the legislation was in place we decided we’d go to the European market given that it’s a developed and big market,” she said. “It was a little more pricey than the US market at the time, but we wanted – as I said – to get a very broadly distributed, well received issue, and we felt the European market was going to offer that to us.

“But of course conditions deteriorated quite quickly at the end of last year and we felt, given what we were trying to achieve out of this inaugural issue, that it was better for us to wait for more constructive conditions, and I think we’ve been well served by waiting until this window that came up in the last couple of days.”

Jez Walsh, global head of covered bond syndicate at RBS, said that the issuer was mindful of the Australian supply in the pipeline but at the same time clear that it should be the first mover and manage this well.

“CBA wanted to get the right entry point and had been monitoring the market diligently for several weeks for that moment,” he said. “There isn’t any question as to the strengths of the jurisdiction and its banks.

“We feel we got it right.”

At 100bp over mid-swaps the transaction offered value, he said, although arguably a tighter level would be justified.

“Going forward you will see that, but they needed to establish themselves and their curve, and I’m very encouraged by the result,” he added. “The granularity is nice and contrasts with the number of accounts involved in the US.”

Well over 100 accounts participated in the deal, which surpassed the issuer’s initial target of Eu1bn and then Eu1.25bn deal sizes, according to Walsh.

Initial pricing thoughts were informed by trading levels for comparable European supply, with the big four Australian banks’ credit quality and senior unsecured levels also relevant, he said. The pricing is likely comparable to that where a new Australian issue would come in US dollars based on secondary levels and assumed new issue premiums, he added, showing that there was no significant arbitrage.

“The two markets need to have some semblance of being in line,” he said. “Pricing doesn’t have to be identical, but with the basis swap where it is and given that there is some crossover in the investor base you can’t have, at least not over a concerted period of time, a situation where one currency provides some 30bp-40bp better funding – it won’t happen.”

Cobley also said that economics were no longer in favour of dollars and questioned whether a US deal would even have been feasible.

“The advice I’ve received from the houses that I speak to is that the US covered bond market is effectively closed at the present time,” she said. “There are a number of issues. The US covered bond market is quite a new market, it’s not very deep, there are a few major investors that really can make or break a deal in that market, and unfortunately there were a few transactions that were done that didn’t perform well and as a result of that, that market has effectively closed down.

“It’s our hope that it will open again some time soon, but it has vindicated our decision to go to the European market because that’s the one that’s open now, and I suspect that any real difference that existed between those markets perhaps for a short period of time has largely gone now.”

The transaction was the first of three mandated euro debuts for Australian issuers, with NAB beginning to soft sound its own euro debut yesterday (Tuesday) afternoon (see separate article) before CBA’s issue was priced, and ANZ also in the pipeline. Cobley said the issuer was mindful of previous criticisms of a lack of co-ordination among Australian issuers.

“We do keep in touch with the other issuers and I think the fact that we elected at the end of last year to focus on the euro market after we’d seen two of our peers announce that they had wanted to do an issue in the US dollar market, we think is a sign of co-ordination,” she said.

“I know there’s a perception that the Australian issuers have been hitting markets at the same time. I think it’s partly because of the timing of when the legislation came out, the fact that there was a compressed time period before the markets were going to close before the end of the year, and concerns about the markets as a whole. It was fairly natural that all the issuers wanted to get their preparations done prior to Christmas and that was what was achieved.”

UK and Ireland were allocated 31% of CBA’s bonds, Germany and Austria 30%, the Nordics 10%, Australia 7%, Benelux and Switzerland 7%, France 5%, Asia 3%, Netherlands 2%, and others 5%.

Fund managers bought 41%, banks 32%, insurance companies and pension funds 14%, central banks 10%, and private banks 3%.

Cobley said that the issuer will now be gradually building up its profile in the covered bond market.

“The Australian legislation restricts the banks from issuing more than 8% of our Australian assets under a covered bond programme, so for us that means around A$30bn-A$35bn,” she said. “We estimate that we’ll be doing around A$5bn a year, and so it will take us a while to build up to that level of stock in the market.”