Portugal’s Banco Santander Totta returned to the public bond market for the first time in four years yesterday (Tuesday), via a Eu1bn three year obrigações hipotecarias, with officials at the issuer telling The CBR that senior unsecured funding is too expensive compared with covered bonds.

Hugo Albuquerque and Joana Chastre Guerreiro, Banco Santander Totta

Demand for Santander Totta’s deal was very strong, with leads Bank of America Merrill Lynch, BNP Paribas, Crédit Agricole, Santander and UniCredit building an order book of more than Eu2.7bn. They priced the mortgage-backed issue at 88bp over mid-swaps, after guidance of 90bp-95bp and initial price thoughts (IPTs) of the 100bp over area.

Hugo Albuquerque, head of a new tax department at Totta, and Joana Chastre Guerreiro, who is this month taking over his long term funding responsibilities as the new head of the corporate finance department, managed the deal at Totta, and Albuquerque said that the issuer was able to achieve the pricing it had targeted.

“The deal went very well, and the pricing was between our parent company and other Portuguese issuers, so in the end that was in line with our target,” he said. “The main surprise was the pace of bookbuilding – the book was done in almost one hour.”

The leads had gathered more than Eu2bn of indications of interest (IOI) after one hour in response to IPTs. Including the IOI process the order books were open for an hour and a half, according to a syndicate banker on the deal.

At 88bp over, the deal was priced some 40bp inside Portuguese government bonds, around 40bp back of covered bonds issued by its parent, Banco Santander, and inside December 2016 covered bonds of Caixa Geral de Depósitos, which were trading at around 103bp over before Totta’s deal was launched, said the lead syndicate banker.

He noted that the leads did not revise guidance from 90bp-95bp before fixing the spread at 88bp over, but said that this was felt to be justified given the order book and the leads’ confidence that the bonds would perform in the secondary market.

The bonds were this (Wednesday) morning said to be trading around 83bp over.

Totta had last sold a benchmark covered bond in March 2010, and last tapped the benchmark senior unsecured market in June 2009.

Albuquerque said that the issuer felt the time was right for a covered bond issue, with the market in good shape and spreads having tightened over the past month, and the senior unsecured market not economically attractive for the issuer.

“We still think the differential between senior unsecured and covered bonds is too wide to do a senior unsecured, which would impact our net interest margin,” he said.

Guerreiro said that a covered bond deal had been on Totta’s agenda for this year, not least because of a redemption coming up in October.

Some 170 investors participated in the transaction, according to the issuer.

“There was good diversification of investors by geography as there was broad European distribution,” said Guerreiro. “By type we would highlight that the participation is as expected.”

A lead syndicate official noted that the order book was very granular, with almost half of the orders for up to Eu5m.

Albuquerque said that the issuer did not feel a need to go on a roadshow to prepare its transaction as it had taken the opportunity to meet with some investors at industry conferences.

“Investors like the quality of this paper and they have easy access to the cover pool information,” he added.

Germany and Austria took 21%, the UK and Ireland 21%, the Nordics and Spain 15% each, France 8%, the Benelux 6%, Portugal and Switzerland 3% apiece, Italy 2%, Greece 1%, and others 5%.

Fund managers were allocated 61%, insurance companies and pension funds 17%, banks and private banks 16%, and central banks 6%.