NAB is out with the first US-targeted benchmark covered bond since early June today (Tuesday) and only the third such issue this year as the premium for raising funds in US dollars has shrunk versus euros and appetite remains, according to syndicate bankers.

Leads Bank of America Merrill Lynch, HSBC, NAB, RBC Capital Markets and TD Securities announced a five year transaction for National Australia Bank this morning and began collecting indications of interest on the basis of initial price thoughts of the mid-30s over mid-swaps. A lead syndicate official said that this was generating “reasonable interest out of Europe”, with Asian interest also involved, and that the leads were happy with the initial response.

Yesterday (Monday) was the US Labor Day public holiday.

He said that in coming to the US dollar market, NAB was taking advantage of an improved cross-currency basis swap and underlying demand despite low coupons.

“NAB has room to issue and demand is there,” he said.

NAB’s deal is its first US-targeted benchmark covered bond since 21 November last year, when it sold a US$1.25bn (Eu952m) five-and-a-quarter year issue at 47bp over mid-swaps. It is also only the third US dollar deal of the year, with the dollar market hitherto seen as generally unable to compete with the lower cost of funding available in euros on a swapped basis.

However, a syndicate official away from the NAB deal this morning said that the cross-currency basis swap has improved, and that instead of issuers having to pay up some 20bp-25bp for US dollars versus euros, the premium has shrunk to 5bp-10bp, depending on the maturity.

“It’s a very small premium now,” he said, praising NAB’s decision to turn to the US market.

The deal comes after NAB on Wednesday tapped the euro market with a Eu500m increase of a May 2021 issue, at 9bp over mid-swaps.

“NAB tapped the seven year already and given the smaller differential now it makes sense to turn to dollars,” said the syndicate banker. “I like that NAB is leading the charge, and not waiting for the Canadians. They’ll get the first mover advantage that Westpac got.”

Another syndicate banker also said that pricing available in US dollars has become more attractive versus euros, especially for non-European issuers. European bank demand for Australian covered bonds is seen as strengthening on anticipation of the issuance counting toward regulatory Liquidity Coverage Ratios (LCRs), but Australian deals are not eligible for repo with the European Central Bank.

Westpac Banking Corporation sold the first US-targeted benchmark covered bond of the year, a US$1.75bn five year at 35bp over in May. Commonwealth Bank of Australia followed in early June with a $1.25bn deal, also a five year at 35bp over.

A syndicate banker at one of the NAB leads said that 35bp over mid-swaps in dollars was equivalent to around 10bp over in euros, and quoted a Westpac July 2019 issue bid at 2bp over in euros.

To calculate relative value, the leads used outstanding Australian covered bonds in US dollars, with the syndicate banker putting CBA’s June 2019s at z+33bp over, Westpac May 2019s at 32bp over, and NAB February 2019s at 30bp over.

A syndicate official had yesterday morning said that the spread on NAB’s seven year tap last week would only be enough for up to a five year transaction in dollars, putting the re-offer spread of 9bp over on the increase as equivalent to 33bp over in dollars.

Another syndicate banker this morning said that the level on NAB’s dollar deal is “very fair”, taking the mid-30s as 35bp over and putting this at 12.5bp over in euros, but saying that he expects NAB’s new issue to come tighter, at 30bp-32bp over.

“It’s probably a touch back of where they would come in euros, but it’s in the area,” he said.