Belfius is expected to inaugurate Belgian covered bonds early next week by launching a five year issue, with bankers suggesting it will be well received, citing supportive factors such as a lack of supply and a strong framework, and one envisaging only a small pick-up over the Belgian sovereign.

Belgian banks have been steadily approaching covered bond issuance since a dedicated legal framework made its way through the country’s legislative process, with royal decrees and central bank regulations released in succession since legislation was passed in August.

Belfius and KBC Bank received general authorisation to issue covered bonds from National Bank of Belgium (NBB) last Tuesday (6 November), and Belfius on Friday announced a mandate – awarded to Deutsche Bank, HSBC, Natixis, Nomura, Rabobank in addition to Belfius – for its debut covered bond, which is expected to come with a five year maturity and be launched on Monday, subject to market conditions.

The issuer went on an introductory roadshow in September, and has more recently focussed on covered bond specific marketing, according to a lead syndicate banker. An investor conference call was held on Tuesday, with some 160 accounts said to have participated, with questions asked about topics such as the legal framework and Belfius’s relationship to Dexia, he said.

“They kept the week free for top-up calls, but there hasn’t really been much demand for that because people have familiarised themselves pretty well,” he said. “Execution was easily possible this week, but there’s still some work being done on setting up credit lines now.”

Some market participants had been expecting a deal to emerge this week, with one syndicate banker noting that the issuer will have taken away a week of execution by waiting until next week to tap the market.

The lead syndicate banker said that the issuer was preparing its debut in “exactly the right way”.

Market participants away from the leads were positive about the prospects for the deal – assuming appropriate pricing – in light of factors such as a strong covered bond legal framework – which includes an issuance limit – as well as a solid real estate market and low household indebtedness.

One banker said that the first Belgian covered bond should pay only a small premium over government bonds, perhaps in the single-digit range.

“Inside is too ambitious, maybe,” he said, “but Belgian covered bonds are a strong contender to price flat to inside the sovereign curve.”

Belfius’s deal is likely to meet with strong demand, he added.

“Belfius is a recovery story, and the market is starting to like recovery stories,” he said. “There’ll be fresh lines, it’s a new name – it will fly.”

The leads have not yet communicated any thinking about pricing or comparables, said a syndicate banker on the deal, and are mainly collating any feedback being provided by accounts. The range of pricing ideas being volunteered by investors is quite broad, he added, noting that expectations about the extent to which their credit work should be compensated are arguably over-exaggerated.

He declined to comment on spread suggestions put forward by market participants away from the deal, instead saying that the price discovery process will take into account a range of considerations, such as pricing relative to core European comparables and the host sovereign, as well as pricing of outstanding covered bonds versus their host sovereign.

Pricing relative to senior unsecured is no longer a relevant consideration – “we’re well beyond that” – given how undersupplied the benchmark covered bond market is, he added.

Belfius’s national peer, KBC, has euro senior unsecured paper outstanding, with spreads having ground tighter over the course of the post-summer rally – a Eu500m four year issue is trading at around 120bp over after having been priced at 225bp over in August, while a March 2017 is at around 130bp over after having come at 285bp over.

A syndicate official away from the leads suggested a five year Belfius issue should come in the 45bp-50bp over mid-swaps range, with a five handle a likely starting point to potentially drive the spread tighter from there.

Belgian government bonds and outstanding Axa Bank Europe SCF covered bonds are relevant pricing inputs, according to the syndicate banker, with five year OLOs in the low 20s over and Axa April 2017s trading at around 32bp/22bp over.

Belfius should offer a pick-up over Axa covered bonds, he said, because its deal will be an inaugural issue and, as the former Dexia Bank Belgium, it has associations with the bailed-out Dexia group.

These pricing considerations imply a spread in the 45bp-50bp over range for a new five year issue, according to the syndicate banker, in turn representing a premium of some 20bp-25bp over Belgian government bonds.

“A month ago I would have been more bullish in terms of the spread versus Belgian government bonds,” he said, “but Belgium has rallied since then without Axa following suit.”

He acknowledged the possibility of Axa covered bonds rallying in the lead-up to Belfius issuing, but said that investors were arguably more likely to wait for new supply from Belfius rather than invest in Axa paper.

Another syndicate banker’s relative value considerations put a five year Belfius trade wider, however, in the 70bp over mid-swaps range, based on offering a larger premium over government bonds than French or Austrian covered bonds would come relative to their sovereign.

Belfius’s covered bonds have been assigned preliminary ratings of AAA by Standard & Poor’s and Fitch. The Kingdom of Belgium is rated Aa3/AA/AA.