BPCE priced a five times oversubscribed Eu500m 10 year covered bond yesterday (Wednesday) and a lead banker set out the rationale for IPTs after market participants away from the deal were taken aback by their level and described them as overly cautious.

Leads Barclays, HSBC, Natixis and UniCredit priced the Eu500m no-grow obligations de financement à l’habitat (OH) issue at 43bp over mid-swaps yesterday, with 115 accounts placing Eu2.7bn of orders in total. The BPCE SFH deal was first marketed with initial price thoughts (IPTs) of the 50bp over area, which generated more than Eu1.25bn of indications of interest. Official guidance was then set at the 45bp over area.

The choice of IPTs had syndicate bankers scratching their heads and annoyed some investors as they were seen as being way off the mark – excessively generous – and encouraging a flood of demand for what was only a Eu500m deal.

According to one portfolio manager the departure point was so wide that it raised suspicions among market participants that the issuer could perhaps be in some sort of difficulty.

“The spread was so out of range that at first we all thought there were negative headlines,” he said. “I’ve never experienced anything like it.”

The final re-offer spread of 43bp over was less controversial, although several market participants felt that this, too, was generous.

A syndicate official away from the trade said it was priced “10bp too cheap” and that he could not understand the rationale.

Laurence Ribot, fixed income syndicate at Natixis, said that the issuer wanted to go out with a fair level to ensure quick execution for what was an opportunistic transaction to satisfy limited funding needs.

“The level was fair, without a doubt,” she said.

Another consideration that informed the approach to the spread was wanting to offer a 2.5% yield, which was a key target for some investors, and a sufficiently large premium over French government bonds, according to Ribot.

“The OAT curve is steeper than the swap curve, and we’re not in a market anymore where you can price a French covered bond close to OATs,” she said. “BPCE SFH achieved its tightest spread ever against Bund reference, at 71.5bp over DBR 08/2023.”

At 43bp over, BPCE’s transaction came 14bp back of French government bonds, which incorporates a new issue premium of 3bp when compared with a March 2022 BPCE issue that is marked at 11bp over OATs, according to Ribot.

“That is pretty tight pricing in the end,” she said.

Limiting a deal’s size at the outset already creates the condition for a strongly oversubscribed order book, she added, but the leads felt that offering fair value was the only way to achieve the issuer’s goals of a quick transaction with a final spread offering a limited new issue premium.

“There is a lot of liquidity available but it’s late in the year and investors are selective, more than they were earlier this year, and if you don’t start with fair value they can pass on a trade,” she said.

Germany and Austria took 36%, France 22%, the UK and Ireland 18%, the Benelux 12%, Asia 4%, the Nordics 4%, Switzerland 2%, and southern Europe 2%.

Asset managers were allocated 32%, insurance companies and pension funds 27%, banks 24%, and central banks 17%.