A bank bid strengthened by anticipation that non-EU covered bonds will count toward LCRs helped NAB size a large increase of a May 2021 issue yesterday (Wednesday) despite a sharp summer rally in Australian covered bonds, said lead syndicate bankers.

The tap, of a Eu750m 1.375% National Australia Bank covered bond first launched in May, was marketed as for a minimum of Eu250m but ended up being sized at Eu500m. The order book “covered the deal”, according to a syndicate banker at one of the leads – Crédit Agricole, NAB and UBS.

The increase was priced at 9bp over mid-swaps, in line with guidance of the 9bp over area that was revised from initial price thoughts of the 10bp over area. Syndicate bankers on the deal said it reflected a sharp rally in Australian covered bonds over the summer — the original deal was priced at 26bp over at the end of May — and continued strong demand despite tight levels.

A syndicate official said that although the entire covered bond market has “ground tighter” over the past few months, the Australians’ performance stands out.

“We haven’t seen covered bonds as a whole tighten by 17bp in three months,” he said.

Some market participants felt that, at 9bp over, NAB’s tap was cheap. The leads put the new issue premium at 1bp over, saying the outstanding issue was bid at 8bp over before the increase was announced. A syndicate banker away from the leads said mid levels are a more appropriate reference, and that the NAB 2021s were at 5.5bp over on this basis, suggesting a new issue concession “more in line with a new benchmark premium”.

“The caveat to that is that the original deal came at 26bp,” he said, but qualified that by noting that the entire market has tightened.

The lead syndicate banker said that the tap for NAB highlighted the 2021 bond’s secondary market performance and the wider belief among investors than Australian covered bonds will be eligible for Liquidity Coverage Ratios (LCRs) under new European bank regulations.

“They’re buying into that,” he said, noting that this was reflected in a tightening of the spread differential between European and Australian covered bonds, as well as New Zealand issuance, over the past few months.

Leaked European Commission LCR texts in recent months have raised hopes that non-EU issuers’ covered bonds will be eligible for the regulatory liquidity buffer requirements.

Banks took 32% of the NAB 2021 issue when it was first launched in May, but accounted for 56% of yesterday’s increase, according to a lead syndicate banker. Central banks and SSAs took 27% (21% of the original deal), asset managers 8% (24%), insurance companies 5% (16%), private banks and retail 4% (0%), and corporates 0% (7%).

Germany took 37% (48%), France 16% (6%), Switzerland 9% (2%), the Benelux 8% (16%), Asia 8% (3%), Nordics 5% (4%), the UK 2% (8%), and other Europe 15% (6%).

“A comparison of distribution stats makes it clear,” said the lead syndicate banker. “Banks take over from real money, while German demand increases further.”

The possibility of a regulatory-fuelled increased bank treasury bid driving out real money has previously been flagged as a concern by a representative of the asset manager community, and the syndicate official also raised the question of whether banks’ taking over from real money amounts to the latter being priced out of the market.

Another banker said that the outcome of the increase suggests the euro market’s competitiveness versus the US dollar market, which has generally not been attractive for Yankee issuers this year, has been enhanced for Australian issuers.