Société Générale SFH provided an unexpected new issue in the covered bond market today (Tuesday) and its first benchmark of the year, a Eu750m no-grow 10 year deal that drew some Eu1.2bn of demand and came with a limited pick-up over French government bonds.

Leads Crédit Agricole, Erste, ING, Société Générale and UniCredit went out with initial price thoughts (IPTs) of the high 20s over mid-swaps before tightening the spread to set guidance at 27bp over mid-swaps, plus or minus 1bp, with indications of interest at Eu1bn. The spread was fixed at 26bp over, with an order book of around Eu1.2bn.

A syndicate official on the deal said that comparables included two outstanding Société Générale deals, January 2022 and February 2023 issues that were trading at 16bp over and 22bp over, respectively. According to the syndicate banker this would mean today’s issue is coming without a new issue premium, taking into account an extra 4bp for the extension to an April 2024 maturity.

The syndicate official said that the spread versus OATs was a more important consideration, however.

“If you take May 2024 OATs, which do not perfectly match our maturity, you come to the conclusion that today’s deal included 1bp of pick-up,” he said. “If you do an interpolation then you could argue that it would be a little bit more, something around 2bp.”

A syndicate official away from the leads said that the trade was “a test of the market”, pointing out that it is coming after a recent rates rally and that it offers little in the way of a pick-up over French government bonds.

“The stats should be interesting,” he said. “I would expect France to be on the lower side.”

He put 10 year rates at 1.74% today, down from highs of 2.16%-2.18% this year, noting that there had been a substantial rally last week.

The lead syndicate banker said the deal met with strong demand, including from many quality investors who had expressed a desire for a covered bond that provided 1bp-2bp of pick-up over French government bonds.

“We could print at 26bp over without losing investor interest, and we managed to balance investor and issuer wishes,” he said. “The deal included participation from French investors of around 20%.”

The lead official said that the market is in strong shape, as indicated by the number of transactions across a variety of different asset classes out today, and that Société Générale was able to come to market without much notice given the strength of its name. A lack of competing supply was also a benefit for the deal, he said.

The mandate for the deal is understood to have been awarded this morning.

A syndicate banker away from the leads said that the Eu750m cap on the deal benefitted the transaction, saying during the IPT stage that the spread looked fair and that the deal should work well given the issuer’s credit.