CIBC took advantage of competitive funding levels in euros to make a strategic return to the currency with a Eu1bn five year inaugural legislative covered bond yesterday (Wednesday), and an official at the issuer told The CBR that the Canadian issuer did so from a position of strength.

CIBC issued its debut covered bond in euros in September 2008, but has since eschewed the euro market for, mainly, the US dollar market. Wojtek Niebrzydowski, vice president, treasury, at CIBC, said that competitive funding levels in the euro market opened the way to a strategic return to euros.

“In the last two months, for the first time in four if not five years, euros made sense in terms of economics,” he told The Covered Bond Report. “That aside – and notwithstanding that we have been obviously very successful in the US market with our insured programme – we were very keen on re-establishing our name in the covered bond space in euros from a strategic funding perspective as long as the economics worked out.

“You are talking about a Eu2tr plus market that has been around for 200 years versus a $140bn market that has been around for some four to six years. And in the context of the two, probably around 40% of the dollar covered paper is Canadian versus less than 1% in euros when we were making the decision where to issue.”

After having its new programme approved by CMHC on 3 July, CIBC announced a European roadshow for 15-19 July, raising expectations that it would reopen the euro covered bond market for Canadians. However, the time required to finalise the documentation necessary for the new issue meant that Royal Bank of Canada – whose legislative programme is an amended version of its previous programme – could tap the market first.

“To my knowledge, the process of finalising documentation is a bit different for someone that has to start a programme from scratch versus making amendments to an existing programme to fit the legislative framework,” said Niebrzydowski. “For instance, we couldn’t effect the sale of the collateral to the guarantor entity until the programme was constituted and all the documents executed.”

With everything in place by the end of last week, CIBC announced its mandate on Tuesday afternoon. Leads CIBC, Commerzbank, HSBC and RBS went out with initial price thoughts of the 12bp over mid-swaps area before setting guidance of 10bp plus or minus 1bp and pricing the issue at 9bp over on the back of a Eu3bn order book.

“We are very happy with the result,” said Niebrzydowski.

RBC’s Eu2bn seven year deal was priced at 16bp over mid-swaps last Thursday (25 July). Niebrzydowski said that the RBC deal was a very useful reference point.

“Obviously it served to confirm that the market was there and the interest was reasonably good,” he said. “But it would have been likely that, based on the feedback we received during the roadshow and speaking with a number of investors after the roadshow, we would have gone ahead anyway.”

Some market participants were critical of how pricing on RBC’s deal was tightened from initial price thoughts of the low 20s to the re-offer of 16bp. Mindful of this, Niebrzydowski said that the pricing of CIBC’s deal was kept fairly consistent.

“We had the benefit of the roadshow where we made it fairly clear where we would expect to issue in terms of relative value,” he said. “And in most cases we were given reasonably clear indications whether or not this worked for the buy-side.

“So we just took an approach to execution whereby both sides knew approximately where the transaction should come and we went consistently along that path. I’d like to think there shouldn’t have been many surprises from where we started to where we ended up.”

A lead syndicate official echoed this, saying that the leads managed to keep the range between initial price thoughts and final pricing to 3bp. There was little price sensitivity, he said, with the order book only shrinking slightly when the spread was fixed at 9bp over.

At that spread, CIBC’s deal came only with a small premium versus a theoretical secondary market level for a RBC five year transaction, he added, with the issuer normally having paid a larger pick-up to its peer.

CIBC and RBC are each rated by four rating agencies, with RBC bearing AA- and AA ratings from S&P and Fitch, respectively, versus A+ and AA- for CIBC (both covered bonds are rated triple-A).

“But the deal was limited in size, and 9bp is a fair level,” said the lead syndicate manager.

Wojtek Niebrzydowski, CIBC

Niebrzydowski said that it is hard to quantify what difference the new Canadian covered bond legislation and collateral may have made to the level of demand and pricing of the deal.

“I don’t believe – although this ultimately may change –that when we went to the US and Australian markets legislation would have made an appreciable difference, if anything at all,” he said. “But the legislative stamp of approval is important for Europe.

“However, I’m really not in a position to make a guess whether there would have been 50 investors and a Eu2bn book as opposed to 100 plus and Eu3bn – it’s next to impossible to put a number on that.”

German accounts were allocated 38% of the issue, the UK/Ireland 24%, the Benelux/France 11%, the Nordics/Switzerland 9%, other Europe 4%, Asia 6%, and the rest of the world 8%. Banks took 38%, central banks/agencies 30%, funds 27%, corporates 4%, and others 1%.

Niebrzydowski also said that a wider change in the perception of Canadian credits had occurred since CIBC’s last euro issue.

“The difficulty in making a comparison lies in the fact that only a limited number of investors knew much about Canadian programmes, Canadian banks, Canadian sovereign in 2008,” said Niebrzydowski. “Notwithstanding that two other banks had issued, but the US was in the middle of the sub-prime crisis, and probably a fair number of people in Europe at that time expected this to happen anytime here in Canada. Thankfully, it didn’t happen – and there are many good reasons why it didn’t.

“Issuing now, we are doing so from a position of strength. Globally fixed income investors are much more familiar with the profile and the characteristics of the Canadian banks and the Canadian sovereign than they would have been in 2008. And, for those accounts that follow what is happening outside euros, we’ve established a successful track record in other currencies, obviously in US dollars but also Swissies and Aussies.”

CIBC and RBC are now positioned at the tight end of the euro market, close to Nordic and Swiss credits. This contrasts with the summer of 2008, when Canadian credits were materially widening in the market.

“I remember in 2008 in one instance we were having a discussion why Canadian covered should price through what is now considered one of the peripherals,” said Niebrzydowski.

CIBC intends to be a “periodic” issuer in euros now, he said, to the extent the currency is competitive vis-à-vis domestic funding levels and not precluding issuance in other currencies.

CIBC has been the Canadian issuer closest to a 4% cap on covered bond issuance relative to total assets put in place by the Office of the Superintendent of Financial Institutions (OSFI). Ahead of the new issue it had outstandings of C$11.0bn equivalent off its old programme versus an OSFI maximum of $15.6bn, according to a supplementary prospectus – under the new legislation issuers must disclose the figures.

“The euro trades adds around C$1.37bn, but we have upcoming maturities,” said Niebrzydowski, “so there is some flexibility to manage and utilise the programme – notwithstanding that I don’t think anyone would disagree that the 4% cap is extremely restrictive.”