AIB Mortgage Bank priced its second benchmark covered bond in two months yesterday (Tuesday), and an official at the issuer said that the deal was part of a “step-by-step” process to rebuild its curve and revealed increasing confidence in Irish covered bonds and the country’s banking system.

Orders totalling Eu2.2bn from 162 accounts were placed for a three-and-a-half year Asset Covered Security that was sized at Eu500m, with Seán Cremen, head of wholesale treasury, Allied Irish Banks, identifying the quality of the order book as the main highlight of the transaction.

“We’re very happy with the book, which was similar to the one for our November deal,” he said. “There was a lot of real money demand, and the deal is well placed so hopefully it will perform.”

Foreign investors were allocated nearly all the bonds, with Ireland only taking 1%. Germany and Austria took 52%, the UK 17%, France 10%, Nordics 9%, Switzerland 5%, the Benelux 2%, Italy 1%, and others 3%. Asset managers were allocated 62%, banks and bank treasuries 14%, insurance companies and pension funds 13%, retail 5%, hedge funds 3%, and others 3%.

Leads Barclays, Deutsche Bank, Morgan Stanley and UBS priced the deal at 185bp over mid-swaps after going out with initial price thoughts of the 200bp over area and then guidance of 190bp-195bp over.

Lead syndicate officials said that at 185bp over the deal came flat to through the issuer’s curve based on secondary market levels for outstanding December 2015 and July 2017 ACS issues.

Armin Peter, head of covered bond business and syndicate at UBS, said that the strong demand from a large number of investors is notable given tight pricing and a much smaller coupon compared with that on a Eu500m three year issue for AIB in November. Yesterday’s AIB ACS came with a 2.625% coupon versus a 3.125% coupon in November.

“In a way AIB’s deal at mid-swaps plus 185bp, like other peripheral deals that continue to hit the screens, confirms that the peripheral trade remains solid with a very comparable high number of investors continuing to engage despite the recent rally,” said Peter.

Cremen noted that the issuer is still paying a premium over Irish government bonds but that this differential has narrowed, from around 120bp to 25bp-30bp, since AIB sold its three year at 270bp over at the end of November.

“It shows that people are getting comfortable with the ACS product and the banking system in Ireland,” he said, “and that is feeding into spreads.”

AIB’s new issue comes after the Irish government, via the National Treasury Management Agency (NTMA), earlier this month auctioned Eu2.5bn of five year bonds in a syndicated tap that was seen as a step towards regaining full market access.

“What the government did was very constructive, and is feeding into a certain confidence about the Irish banking system,” said Cremen.

AIB’s November deal was its first benchmark covered bond in five years, coming not long after a Bank of Ireland Mortgage Bank Eu1bn three year ACS that was the first non-government guaranteed issue in the public market for an Irish bank in three years.

Yesterday’s transaction is consistent with the strategy that AIB has been communicating to investors for several months, said Cremen.

“We said we would re-engage with the market on a measured basis, and this is part of rebuilding our curve,” he said.

The choice of maturity, which a banker had questioned for being so close to that of its November issue, was also in line with the market approach that AIB has been articulating to investors rather than being driven by concerns about wider spreads entailed by longer dated transactions, added Cremen.

“We’re conscious of spread but our focus is on a measured re-engagement.” he said, “This is a step-by-step process and not something we intend to do quickly.”

He declined to be specific about the issuer’s further covered bond funding plans for 2013, but said that the issuer will be “keeping an eye out” as the year unfolds.