RBC quickly turned around its third deal in just over a week when it yesterday (Thursday) launched a Eu2bn seven year covered bond mandated the day before, while the coast is clear for CIBC as euros finally return to being competitive for Canadians.

Royal Bank of Canada’s deal is the first Canadian benchmark covered bond in euros since September 2008, and was launched under a new covered bond law that RBC inaugurated with a $1.75bn three year covered bond last Tuesday (16 July). A $2bn (Eu1.51bn/C$2.05bn) five year senior unsecured deal came in between that deal and yesterday’s euro covered bond.

“The highlight this week has clearly been the funding activities of RBC,” said Armin Peter, head of EMEA debt capital markets syndicate at UBS. “After five years of waiting, the return of the Canadian covered bond to euros was a great success.”

David Power, vice president, corporate treasury at RBC, said that the outcome of the deal surpassed the issuer’s expectations with respect to size, and that the pricing was also pleasing.

“We’re very happy with the transaction,” he said. “Our expectations for size were a little bit more modest and the mid-swaps 16bp level translates into a level that on any basis, including swapped to other currencies, makes sense for us and is in line with what we would hope to achieve in a covered bond.”

Leads Barclays, BNP Paribas, Deutsche Bank and RBC built an orderbook of around Eu3.5bn for the transaction, thought to be the biggest for a euro deal this year, and priced the issue at 16bp over mid-swaps.

Richard Kemmish, head of covered bond origination at Credit Suisse, said that the deal illustrates an important development, namely that spreads in euros and US dollars are converging.

Pricing in the two markets will have differed for RBC in the different maturities of its deals, he said, but only slightly.

“It’s been five years since euro levels were last competitive for Canadian issuers,” said Kemmish. “The driving force of this convergence is clear – the reduction of the basis swap between euros and dollars – currently 25 basis points, less than half what it was 12 months ago.”

Canadian Imperial Bank of Commerce (CIBC) is set to benefit from the shrinking of the euro-dollar basis swap spread if it goes ahead with a euro trade for which it laid the ground with a roadshow last week. The issuer had been expected to reopen the Canadian euro covered bond market given that it announced the mandate for a European roadshow and potential follow-up deal on 10 July, but documentation issues delayed a move.

A supplementary prospectus was approved by the UK Listing Authority yesterday. A syndicate official at one of the CIBC leads – CIBC, Commerzbank, HSBC and RBS [corrected from ING]– said that the issuer enters into blackout next Thursday (1 August) and would therefore have to launch a deal early next week, a move that will be evaluated at the time, or postpone until early September. [The article was amended to remove a statement that all CIBC documentation is in place.]

RBC jumps on good conditions

In launching a deal yesterday, RBC came before CIBC, but Power said that he does not have knowledge of CIBC’s plans and that the timing of RBC’s deal was a response to the market backdrop.

“It’s a function of the market conditions being very favourable,” he said, “and also a byproduct of the fact that we only got our programme registered under the legislation this month.”

RBC and CIBC were the first Canadian banks to have new covered bond programmes registered with Canada Mortgage & Housing Corp (CMHC), the administrator of Canada’s new legislative framework. The programmes entered CMHC’s register on 3 July, with Bank of Nova Scotia’s registered on Monday.

RBC mandated the deal on Wednesday, and was advised that the market was open to the issuer without there being a need for any investor work, added Power.

The number of accounts – around 150 – is a highlight of the transaction, he said, being the highest number for a RBC euro covered bond.

“That shows that our investor base is broadening out,” he said.

Germany and Austria were allocated 47%, France 13%, the UK and Ireland 13%, Scandinavia 9%, Benelux 6%, Switzerland 5%, Asia 3%, and others 4%.

Banks took 43%, asset managers 38%, insurance companies and pension funds 11%, and central banks and agencies 8%.

A syndicate official away from the leads said that the size of the orderbook surprised some market participants, and that RBC’s deal, alongside that for UniCredit Bank Austria on Tuesday, showed that the market is open for transactions in the five to seven year maturity range.

The investor base could be thinner next week, but many accounts will still be manned, he added.

RBC’s deal came in for some criticism yesterday from syndicate officials who felt that the transaction came with an overly generous spread at the outset, before the spread was eventually tightened to what they saw as an acceptable level.

Some investors said that the large move from initial price thoughts to the re-offer spread was the main, problematic, issue for them.

The leads went out with initial price thoughts of the low 20s before setting guidance at the 18bp over area and then fixing the spread at 16bp over.

One syndicate banker away from the leads saw the reoffer spread putting RBC’s deal some 2bp back of Scandinavian covered bonds, which market participations said was the most relevant comparable, flat to Swiss deals and 10bp-12bp inside Australian paper.

“The deal performed into the end of the day to close 15bp/13bp and should serve as a good pricing reference for other issuers to follow,” he said.

A lead syndicate official said that the leads took what they felt was the right approach for the time of year and the type of transaction that RBC’s deal was – a sort of inaugural trade given how long it had been since the last Canadian euro covered bond – and given that RBC had not gone on a roadshow before the deal.