SG SFH launched a Eu1.5bn seven year covered bond today (Thursday), with its leads defending initial guidance that helped generate a Eu6bn book as necessary given a weak market opening and wider considerations that mean new issue premiums are still required.

Leads Banca IMI, Barclays Capital, Danske Bank, Deutsche Bank and Natixis this morning started taking IoIs on the seven year issue on the basis of initial pricing thoughts of the 120bp over mid-swaps area, gathering Eu2bn of orders in the first 20 minutes, according to a syndicate official on the deal. Books were opened with official guidance of 110bp-115bp over, and the spread was fixed at 107bp on the back of a Eu6bn book.

A syndicate official at one of the leads said that the 120bp over area included a new issue premium of around 10bp over, with the 107bp over spread amounting to a “negative” concession.

This was a superb result, he said, noting that it came after earlier pricing thoughts that had incorporated a much smaller new issue premium than a 20bp-25bp average from the beginning of the year.

But while acknowledging that in light of the final pricing and the level of demand the deal could be considered a success, some syndicate bankers away from the leads said the 120bp over starting point was too generous.

One said he would have set a tighter initial spread range of 105bp-110bp, while another said that 120bp over as a starting point for the transaction was very generous, incorporating a new issue premium of at least 20bp. He put a fair secondary level for a SG SFH seven year at around 95bp, based on an interpolated curve between June 2016, where he said the issuer has bonds trading around 78bp-79bp mid-market, and January 2022, where outstandings are at around 110bp-112bp mid.

A new issue premium of between 5bp and 10bp should be sufficient for an issuer like SG, he said, adding that investors are cash rich. He said that final pricing of 107bp was “OK-ish”.

Another syndicate banker away from the leads also said the guidance was too wide, couching his comments in part in the context of a market where liquidity from ECB LTROs has removed funding pressures.

“In this market with less supply and less funding pressures due to the second LTRO, it was far too wide,” he said. “We do not need the kind of new issue premium we saw at the beginning of the year. A jurisdiction like France should have a new issue premium that is flat to 5bp maximum.”

Syndicate officials on SG’s transaction said that the pricing took into account factors such as a weaker market this morning, with one saying that the leads went out with a level 2bp-3bp wider as a result.

“The market was not in good shape this morning on the back of Bernanke’s comments last night, so we were being cautious,” he said.

Federal Reserve chairman Ben Bernanke testified on Wednesday on monetary policy and the economy before the House Financial Services Committee.

The syndicate official compared the deal to a SG March 2019 that said was at 110bp, and said a new issue premium of 10bp had been applied.

“This new issue premium is something that investors expect,” he said.

Another syndicate official at the leads said that while there was a good market opening this morning, flows leaned towards selling rather than buying and that sentiment took on a more bullish tone as the morning progressed.

He also suggested that SG’s deal reflected broader trends in the market, with demand generally so high that there is “strong systemic oversubscription”, including in the senior unsecured and agency markets, with many deals in these markets reaching final pricing that is considerably tighter than initial spreads.

“Order books are finishing with volumes at least double the size we used to see,” he said.

However, he suggested that deal execution still needed to be mindful of certain risks and sensitivities.

“Money is everywhere, but that doesn’t mean you can do whatever you want,” he said.

He said that although new issue premiums had recently shrunk from the higher premiums paid at the start of the year, lead managers still had to choose levels palatable to investors, suggesting that starting with spreads inside of secondary levels would be tough, with such a position also difficult to take vis-à-vis an issuer.

Lead managers’ approach to pricing and execution also still needs to include a cautious element given the possibility of a turn in market sentiment on a given day, he suggested, with the emergence of a potentially competing deal offering better value also something to take into account.

Pricing of 107bp over also meant that SG’s obligations à l’habitat came tighter than where a new obligations foncières from the bank’s SCF issuer would come, he added, which reflects a pricing hierarchy in the primary market that secondary spreads do not.

Germany’s ING-DiBa is wrapping up a roadshow in Scandinavia tomorrow (Friday), and is said to be planning to come to market next week, subject to market conditions. BNP Paribas, Commerzbank and LBBW are working with ING on the project. The Covered Bond Report understands that a five or seven year deal is most likely.

Yorkshire Building Society is also meeting investors after it released 2011 financial results on Friday.

Bankinter has been mentioned for some time as a possible new issue candidate. A syndicate banker, who is not working with the issuer, said that the issuer is “struggling” with a lack of performance on recent Spanish covered bond deals, with CaixaBank and Banesto transactions serving as reference points.