Suncorp opened the domestic Australian covered bond market for second tier names today (Wednesday) with an upsized A$1.6bn (Eu1.26bn/US$1.58bn) dual tranche issue, and the bank’s head of funding said that it will next turn to deals in Swiss francs and euros while also revisiting RMBS.

Lead managers Barclays, Deutsche Bank, RBC Capital Markets and UBS increased a four and a half year fixed rate tranche from an initially targeted A$750m to A$1.1bn, pricing the issue at 140bp over mid-swaps.

A second, A$500m two and a half year floating rate tranche priced at 105bp over BBSW was added in response to demand, Simon Lewis, head of funding at Suncorp, told the Covered Bond Report.

“As the fifth bank from Australia to get a deal done, we were very pleased with the response: 80% of the fixed rate tranche went to real money accounts, which is a huge response to us,” he said. “As a result of the overwhelming support that we had from the funds, it didn’t leave much left over for some of the balance sheets who were also keen to participate in the fixed rate tranche, because A$1.1bn is a reasonable size and is a proven liquidity pool, especially when we had a large number of investors participating.

“So we decided at lunchtime to also launch a A$500m two and a half year floater, which is also targeting some of the bank balance sheets and funds who have a sub-three year mandate. This means that we’ve issued A$1.6bn that is effectively on a weighted average basis approximately four year funding at about 129bp.”

Some 54 investors participated across the two tranches, mainly domestic but also international accounts. Lewis said that there was a small amount of interest from Europe, including the UK, while half a dozen investors from Asia, including Japan participated, with these including private banks and funds.

Lewis said that the issuer had been discussing the deal with investors for some six months, and had roadshowed in Australia as well as visiting the UK, France and Switzerland. He also paid tribute to the work done by Australia’s big four in laying the foundations of the country’s covered bond market.

“We’re very fortunate that the major banks in Australia have shown some price leadership and have built up an awareness and education process,” he said. “The Australian fund management community in particular needed to see strong banks such as CBA, Westpac and ANZ show some guidance and that this is a product that will be supported.

“CBA should be commended for the leadership position that they took domestically. They got a level of engagement on that transaction, and Westpac the week after, that was unprecedented, and as a result all of a sudden Suncorp’s got 50 investors in Australia to talk to who have bought – not who are looking at, but who have bought covered bonds, and there’s a big difference between tyre kickers and people who write cheques.”

When covered bond legislation was being introduced in Australia last year, some market participants had expressed concerns that the instrument would benefit the majors and prove beyond the reaches of smaller players. However, Lewis said he is optimistic that the way is now clear for other smaller Australian banks to issue covered bonds.

“The issue is that the major banks in Australia are all rated AA-,” he said. “Suncorp is only one notch below at A+, but for some of the smaller regional banks in Australia who are rated triple-B, it will be a greater challenge and in fact an insurmountable challenge, we feel, for them to achieve a triple-A rating.

“However, we are certainly hopeful and the feedback from the extensive roadshow that we conducted throughout Australia – which saw Suncorp presenting to more than 60 investors over five days – gives me great hope that this transaction will lead to the development of a covered bond market for some of the smaller banks in Australia that may not necessarily need to get to a triple-A level. Whilst I do believe that that is some time away, if some of the other regional banks who have demonstrated discipline and integrity in the triple-A RMBS market engage with the investors, particularly here in Australia, a double-A covered bond market in Australia will be something we see in the coming years.”

He added that some of the practicalities for smaller banks had also now been worked out.

“There are quite a few things within the four majors’ programmes that we needed to adapt to our particular circumstances,” he said, “and for Suncorp, being one of the smaller guys to be able to achieve the triple-A, to be able to consolidate some of those concessions that are required as a slightly lesser rated institution, that will give some of the smaller institutions the opportunity to look more closely at this product and to follow in our footsteps.”

Suncorp’s deal came after a hearing of the Senate’s economics committee yesterday (Tuesday) where John Laker, chairman of the Australian Prudential Regulation Authority, was asked by Senator David Bushby of the opposition Liberals if there had been any joint issuance from second tier banks – which was contemplated when legislation was being introduced – alongside the covered bonds from the larger institutions.

“Not that I am aware of at this stage,” said Laker. “The four major banks have issued. I think the next tier down are considering it and are close to issue.

“No, on the idea of an aggregated model, we have not had discussions at this stage that I am aware of.

Giving an update to the Senate Committee on how the Australian financial system has been faring and on APRA’s activities, Laker had in his opening statement noted the covered bond issuance of the majors.

“This has established a market for these instruments,” he said. “All retain significant headroom between issues made and the maximum limit they are able to issue, giving them the capacity to issue more covered bonds if additional funding challenges arise.

“APRA continues to monitor this situation closely. At this stage, its strengthened liquidity positions, coupled with the capacity to issue covered bonds and the unused self-securitisations that can be used in repurchase transactions with the Reserve Bank of Australia provide APRA with comfort that ADIs could survive a period of months without access to global term debt markets provided domestic markets continue to operate relatively normally.”

RMBS, Swiss francs and euros in Suncorp mix

Discussing Suncorp’s broader funding strategy, Lewis said that its covered bond programme will complement its residential mortgage backed securities issuance.

“The Apollo RMBS programme remains very important to Suncorp,” he said. “There was nothing in the investor feedback to indicate that covered bonds would detract from the opportunity for us to issue triple-A RMBS. In fact Suncorp intends revisiting the RMBS markets in late August, early September of this year.

“We see the covered bond programme for us as being an investor diversity tool. The term funding requirements for Suncorp remain relatively very small compared with the majors – we only really need to do A$3bn term funding per annum – and we think that we can cover that across RMBS, senior unsecured and covered.”

Lewis said it was particularly pleasing for Suncorp to have completed the covered bond issue after selling an A$650m senior unsecured deal six weeks ago to 38 investors.

“Everybody has said that you can’t do a senior deal and then do a covered bond, but we’ve just done two transactions within two months,” he said. “Whilst that can crimp upon the credit lines that are available to you, we have demonstrated that with the right attitude towards investors and the right level of engagement people will be prepared to support you.

“For us its A$2.25bn worth of funding, remembering that our bank assets are circa A$60bn, so it’s a large amount of money for us without jeopardising the spread integrity of the transactions.”

Lewis said that the decision to inaugurate its covered bond programme with a domestic issue was based on feedback from European covered bond investors.

“Obviously the major banks in Australia were coming first and we asked the European investors what they would like to see the leader of the second tier of the banking sector in Australia do,” he said. “And the very clear message was that they wanted to see us demonstrate access to the domestic fund market, and then bring a transaction in Europe.

“So certainly this transaction will be a precursor to issuance in Europe. Our treasurer and I have just spend a fortnight in Europe and a week in Switzerland in particular, and now that we have clearly demonstrated domestic support, our next step will be to penetrate the Swiss franc market followed by the euro benchmark covered bond market over the next 12-18 months.”