RBC will price the first Canadian euro benchmark covered bond in more than four years today (Thursday), a Eu2bn seven year issue that a lead syndicate banker said balanced size and performance potential ambitions, after others had criticised where the deal was marketed.

The deal is the second covered bond launched under Canada’s new covered bond legislation, with Royal Bank of Canada having inaugurated the framework with a $1.75bn three year last Tuesday (16 July). At Eu2bn, the transaction is only the second euro benchmark covered bond this year that is bigger than Eu1.5bn – a Eu2bn five year for Banco Santander in January is the other such deal.

Canadian Imperial Bank of Commerce (CIBC) had been widely expected to be the Canadian issuer to reopen the euro market to the country’s banks, it having gone on a European roadshow last week, via Commerzbank, HSBC, ING and its own investment bank, but documentation issues are said to have delayed a possible move from CIBC.

A syndicate banker at one of the leads said that it was sensible for RBC to make a move this week given that CIBC has been delayed, and avoid a potential clash next week, and that there was no competing supply in the market today.

A syndicate official at one of the CIBC leads said that a deal next week is possible. The issuer is understood to otherwise be likely to look to the end of August or early September for a transaction, after it comes out of a blackout period. A five year maturity has been mentioned in connection with the deal.

The pricing on RBC’s deal was the main focus this morning, coming in for some sharp criticism from some syndicate officials away from the leads, who variously said the deal was “way too cheap” or “off the charts”.

The comments centred on the level at which the deal was initially marketed rather than the re-offer spread, although some felt that this, too, was cheap.

The leads went out with initial price thoughts of the low 20s before setting official guidance at the 18bp over area and then fixing the spread at 16bp over. More than Eu2.5bn of indications of interest were placed in response to the initial price thoughts, and order books have closed at Eu3.5bn, a far cry from the size of most order books this year.

“They ended up in the right spread territory but I was amazed when I saw the starting point,” said a syndicate banker away from the deal. “The low 20s is off the charts, the wrong postcode, beyond any margin of error that I would find acceptable.”

Another echoed this sentiment, saying that he saw fair value at 15bp over and early guidance was completely wrong.

Several syndicate officials highlighted that the deal was pitched at what they felt was the wrong level despite the syndicate group including experienced and top ranked covered bond houses, and there being a host of useful comparables and other input for the leads to draw on.

Nordic covered bonds are the most relevant comparables, they said, with one arguing that RBC should trade flat to through a new Scandinavian issue, and that this would point to a spread tighter than 16bp over.

Another said that he would assume investor feedback from the CIBC roadshow would have filtered through to the RBC leads, and that this would have pointed to a tighter spread. The adjustment of the spread on RBC’s deal prompted some accounts to pull some orders, he added.

A lead syndicate official said that RBC had obtained “a great outcome”.

“It was a very good response,” he said, “which in some way was expected given the lack of supply from Canada and the positive response there was to the CIBC roadshow.”

He defended the execution of the deal, saying that the right approach had been taken, with the issuer targeting size but also wanting to leave room for the bonds to perform without overdoing it.

“I don’t think it’s way off,” he said, citing comparables such as a Nordea January 2020 at 12bp over mid and SEB and Swedbank trades at around 10bp. Other reference points to factor in include where Australian covered bonds trade – in the mid to high 20s in seven years, he said, bearing in mind that Canadian bonds are eligible for repo with the ECB after the collateral list was extended to take in debt from G10 countries.

Other comparables cited by the leads included Deutsche Pfandbriefbank and Münchener Hypothekenbank deals.