An increased senior-cédulas spread differential helped lure BBVA into the benchmark covered bond market for the first time since March 2011 yesterday (Monday), according to an official at the issuer, while bankers attributed a wider level on the deal today to it being too large.

While several of its national peers have tapped the benchmark covered bond market this year BBVA has focussed on the senior unsecured market, with a Eu2bn five year cédulas hipotecarias issue yesterday its first benchmark covered bond since March 2011. The issuer today (Tuesday) announced that it is buying back Eu1.14bn of covered bonds, which an analyst said is partly intended to cancel retained cédulas and free up collateral for yesterday’s new issue.

Erik Schotkamp, capital and funding management director at BBVA, said that the issuer felt there was good value in a new covered bond issue because the spread differential between senior unsecured and cédulas has reached a “maximum level”, of more than 100bp.

“In the last months this was not the case,” he said, “and we preferred to preserve mortgage collateral.

“We have been monitoring the market to select a good issuance window, and international investors were keen on a new BBVA covered bond as we have not issued since March 2011.”

The deal was the first Spanish covered bond to be priced through the sovereign curve.

Leads Barclays, BBVA, Citi, Deutsche Bank, ING and Natixis gathered more than Eu2.3bn of orders for the mortgage backed issue and set the re-offer spread at 260bp over mid-swaps, equivalent to around 95bp through Bonos, according to Tim Michael, FIG syndicate at Citi.

“Italy paved the way psychologically,” he said, “and as the first Spanish covered bond to price through govvies, BBVA’s deal is a significant transaction for the cédulas market.”

Italy’s UniCredit in August sold the first covered bond to be priced substantially tighter than the sovereign of an issuer, a feat that it repeated with a tap in October and its national peer Intesa Sanpaolo also achieved with an obbligazioni bancarie garantite issue in September.

Schotkamp at BBVA said that investors in the past tended to link sovereign and covered bonds, which set a pricing floor.

“Nowadays, we think investors are valuing the double guarantee of a covered bond of a solid and well diversified global bank as BBVA,” he said.

A syndicate banker said that it was not surprising that BBVA was able to price a covered bond tighter than where the sovereign would raise funding in the same maturity.

“That barrier has been broken a long time ago,” he said. “It’s only because there has been a lack of supply from Spain that we hadn’t seen it before.

“It was only a matter of time.”

BBVA’s covered bonds are now rated by two agencies, after the issuer obtained a rating from Standard & Poor’s (A-) in addition to Moody’s (A3). Schotkamp noted that this is the market standard for top international banks.

“With this movement, we are showing our transparency to investors, as S&P has given BBVA the same level of rating for covered bonds as Moody’s.”

Syndicate bankers said that BBVA’s new issue widened in the secondary market, with one saying this was due to the deal probably having been too large and investors therefore having more orders fulfilled than they may have expected.

A lead syndicate official said the bonds were 10bp wider today, and agreed with outside comment linking the widening to the size of the deal.

“The market wanted a smaller trade,” he said. “It’s a shame, but I think it will stabilise. The deal was beautiful, with a fantastic order book.”

Michael at Citi said that BBVA’s secondary market curve served as the main pricing reference for the issuer’s deal, with pricing at 260bp over incorporating a modest concession of around 5bp. BBVA January 2017s and October 2020s were yesterday around 248bp over and 266bp over bid, respectively, putting fair value around 255bp.

“The market tone is very good and the covered bond market continues to be undersupplied,” he said. “The granular distribution stats are very encouraging, with a broad participation across different regions.”

Foreign investors were allocated 86% of the bonds, with Germany taking 21%, the UK 18%, France 12%, the Netherlands 7%, the US 6%, Italy 4%, Finland 2%, Switzerland 2%, and others 13%. Domestic accounts were allocated 14%.

Asset managers bought 41%, banks 29%, insurance companies 14%, private banks 5%, pension funds and insurance companies 4%, and others 6%.

Belgium’s KBC Bank is due to tomorrow (Wednesday) wrap up investor work ahead of an inaugural covered bond issue. An initial roadshow schedule has the roadshow ending today, but a syndicate banker at one of the leads – Deutsche Bank, DZ Bank, Goldman Sachs, KBC and Natixis – said that additional investor calls will take place tomorrow.

He said the timing of a deal is to be confirmed, with the maturity also still to be decided.

A syndicate banker away from the leads said that KBC is expected to make its debut this week rather than next, and for its deal to feature a five year maturity to target a broad investor base.

Belfius Bank last Monday (19 November) sold the first Belgian covered bond, a Eu1.25bn five year that was priced at 45bp over mid-swaps and is said to be trading at around 35bp over bid, with KBC seen pricing inside of Belfius.

Belfius’s CEO rang the opening bell at NYSE Euronext in Brussels today to mark the settlement of the landmark deal – you can watch it on video here:

BBVA photo: Álvaro Ibáñez/Flickr