Belfius got its post-Dexia public market issuance off to a strong start yesterday (Monday) via a strongly oversubscribed Eu1.25bn five year covered bond that an official at the issuer said kickstarted an important funding diversification.

The deal was the first Belgian covered bond after the country’s covered bond legal framework was finalised last month, with Belfius’s debut paving the way for KBC Bank to tap the market. KBC yesterday announced a mandate, awarded to Deutsche Bank, DZ Bank, Goldman Sachs, KBC and Natixis, and is expected by some to launch an inaugural issue next week. Axa Bank Europe SCF issues covered bonds backed by Belgian RMBS, but does so under France’s obligations foncières framework.

KBC could price inside Belfius, said some market participants, and thereby achieve an even tighter spread over Belgian government bonds than that of Belfius’s debut. This was seen as coming at around 25bp over OLOs.

In a statement yesterday KBC said that it plans to issue its first covered bonds this quarter or in the first quarter of next year, and that it aims to issue Eu2bn-Eu3bn of covered bonds per year in the coming years.

Ellen Van Steen, head of long term funding at Belfius, highlighted that the transaction was not only the issuer’s inaugural covered bond but also its first public deal since the bank was bought by the Belgian state and rebranded.

“The issue was important because it was the first public issue of Belfius Bank and we were able to position and promote Belfius as a new issuer in the market,” she said.

The issuer has already issued off an EMTN programme, but with the finalisation of a covered bond legal framework in Belgium has access to another funding instrument, noted Van Steen.

“This Pandbrieven issue enables us to diversify our funding sources since covered bonds were not possible before in Belgium,” she said. “We can enlarge our investor base and thanks to the legal framework we can now attract covered bond funding at attractive levels.”

Belfius aims to position itself as a regular covered bond issuer, she added, by issuing one benchmark a year, and is pleased with the reception of its inaugural deal.

“The response was very positive, to Belfius as an issuer, the solid Belgian covered bond framework and the cover pool,” she said. “The diversification of accounts was very good.”

Asset managers took 44% of the bonds, banks 29%, insurance companies 15%, pension funds 5%, central banks and agencies 3%, and others 4%. Germany and Austria were allocated 42%, the Benelux 17%, Nordics 13%, France 12%, the UK 8%, Switzerland 3%, southern Europe 2%, and others 3%.

Leads Belfius, Deutsche, HSBC, Natixis, Nomura and Rabobank gathered around Eu5.6bn of orders for the deal, with 197 accounts participating, and priced the deal at 45bp over mid-swaps. Initial price thoughts were set at the 55bp over area, with guidance then set at 45bp-50bp over.

The bonds were trading at 40bp/35bp over this (Tuesday) morning, according to a lead syndicate banker.

He said that Belfius looks to have built the biggest order book for a five year covered bond benchmark this year, and third biggest overall, after Compagnie de Financement Foncier and Banco Santander met with around Eu7bn and Eu8bn of demand, respectively, for Eu2bn three year deals priced in February.

“It’s a great achievement for an inaugural transaction,” he said, “especially from an issuer with no senior curve and that is relatively new on the euro primary market, after separating from Dexia in 2011 and re-branding in 2012.”

Some syndicate officials away from the deal said the initial price thoughts were too wide and represented a defensive strategy, but Mark Pearce, covered bond syndicate at HSBC, said that the 55bp over area was on the tight side of what had emerged as the consensus from investor feedback.

“We were triangulating where other core European issuers trade versus their sovereign,” he added. “Some investors’ feedback was clearly positioning to extract maximum spread purely on the basis of an inaugural deal.”

The initial price thoughts are “entirely defensible” in light of where French and Dutch covered bonds trade versus their sovereign and where Belgian government bonds trade relative to France and the Netherlands, said Pearce.

“We were also minded to ensure that you capture as many of the investors who are engaged on the project as possible for what was a very important transaction for Belfius, investors and the Belgian covered bond market,” he added. “Inaugural deals are very important for new entrants to gain sponsorship from the international investor base.

“It is clear accounts had put in a lot of credit work, which is reflected in the size of the book/number of line items and is a credit to the work done by the issuer in the lead up to the transaction.”

At 45bp over mid-swaps Belfius’s debut came 25bp back of five year OLOs, with Pearce noting that Dutch covered bonds trade around 35bp back of their respective government bonds in five years, and French covered bonds are in the mid to high 20s versus OATs.

An Axa Bank Europe SCF 2017 obligation foncière issue was trading at 28.5bp over OATs before Belfius’s deal, added Pearce, which would put the spread over government bonds on a new five year in line to back of where initial price thoughts were set on Belfius’s transaction.