HSBC SFH launched its first benchmark covered bond in over three years today (Tuesday), a Eu1.25bn 10.5 year deal that was lapped up by investors and bankers said benefitted from a rally in French government bonds that allowed for an attractive pick-up versus OATs.

The deal is the first euro benchmark covered bond in more than three weeks, since Bank of Ireland Mortgage Bank sold a Eu500m five year on 15 March, and the issuer’s first since January 2010, when it launched a Eu1.5bn seven year.

The French issuer mandated eight investment banks to lead manage the transaction – Commerzbank, Crédit Agricole, Danske, HSBC, ING, Natixis, Santander and UniCredit – and this morning they set initial price thoughts for the obligations de financement de l’habitat issue at the high 40s over mid-swaps area. Guidance was subsequently set at 35bp-38bp over before the re-offer spread was fixed at 35bp over for a Eu1.25bn deal, increased from the Eu1bn that the issuer initially had in mind.

The transaction was multiple times – at least three times – oversubscribed, according to a lead syndicate banker.

Syndicate bankers away from the deal said that it benefitted from a recent tightening of French government bonds, which had for some time lagged the performance of other sovereigns and complicated matters for French covered bond issuers.

A lead syndicate official said that a rally in French government bonds since the end of last week was the main trigger for the deal.

“The OAT tightening opened the issuance window for French covered bonds and provided an excellent opportunity for French covered bond issuers to bring something with a pick-up to the sovereign,” he said.

In the past four to five days OATs have tightened some 25bp, with the October 2023s trading at around 28bp over mid, and 1.92% on a yield basis, according to syndicate officials.

“That makes covered bonds look more attractive,” said a banker away from the deal. “It offers a pick-up for French investors who need it, and for other investors looking at French risk it’s a no-brainer to buy the triple-A rated covered bonds from a rare name, so you’ll have the international bid coming on top.”

At 35bp over the deal was offering an attractive premium of the high single-digits to around 10bp over OATs, according to syndicate officials away from the transaction, with the lead syndicate banker putting the pick-up at around 10bp over the October 2023 OATs.

He said that the combination of a French government bond rally and a supply/demand imbalance allowed the leads to price HSBC’s deal without any significant new issue premium, and that it came flat to slightly through Caisse de Refinancement de l’Habitat secondaries that provided the most liquid comparables.

Syndicate bankers away from the deal had said they expected the deal to go well, and said that the issuer was able to achieve a better level as a result of the OAT tightening, with the need to offer a pick-up versus the sovereign having previously acted as a brake on pricing.

“It looks a tight level for a 10 year French covered bond, but not significantly so,” said one. “It’s a great result and the right timing, and extending the maturity means that they will offer a bit more yield, probably just hitting 2%.”

Another said that the market has been starved of supply and that this would support the transaction. He noted that a Eu1bn 12 year Caisse de Refinancement de l’Habitat (CRH) deal in January came nearly flat to OATs to account for the tightest spread versus the sovereign on a new French benchmark, and that HSBC was offering a high single digit premium versus OATs and is also a rare name.

However, another syndicate banker away from HSBC’s transaction was more critical, saying that it was “slightly mishandled” in terms of execution. He said that the 40bp over area was too generous – by around 5bp – a starting point, and that the mid to high 30s would have been a more appropriate starting level for pricing of 32bp over in the end.

He said that the deal would attract a lot of demand given relative value considerations versus the sovereign and the issuer’s scarcity value. In addition, although the issuer did not do itself justice, he said, it may have done a service to the wider market by reopening supply and demonstrating the level of demand.

“It might invigorate the market and help others to make a decision,” he said.

HSBC’s deal is the first new benchmark from a core jurisdiction since Stadshypotek had to set guidance wider than IPTs on a Eu1bn five year deal on 12 March, with some bankers having suggested that the Swedish issuer’s experience could lead to a more cautious approach to deal execution.

Another syndicate banker said that another issuer is expected to announce a deal soon.

The high number of investment banks mandated as lead managers was picked up on by syndicate bankers, with reactions ranging from the seemingly knowingly relaxed – “I’m not sure it’s the appropriate group but you know why they do it” – to the critical, with one saying that it was “a very strange way of doing things” and made the issuer appear “silly”.