BBVA is set to provide a litmus test for the covered bond market in 2015 after having this (Friday) afternoon announced plans for a euro benchmark in the near future, the first public mandate from a Eurozone issuer this year and the first from Spain since a poorly performing Santander deal.

Only Australia’s Westpac has tapped the euro benchmark covered bond market so far in 2015, with a Eu1.25bn seven year issue priced at 14bp over mid-swaps yesterday (Thursday) (see below for more).

The first supply from the Eurozone next week will therefore provide the first market test for issuance that is eligible for the European Central Bank’s third covered bond purchase programme. After helping new issues achieve record tight levels after its launch in October, CBPP3 increasingly stifled real money participation in new benchmarks at the back end of 2014 and the latter issues of the year underperformed.

The first CBPP3-eligible new issues are therefore being awaited for clues as to the state of the primary market, and the planned new issue for Banco Bilbao Vizcaya Argentaria is expected to be launched alongside others.

One banker said several covered bonds should be launched next week, with the asset class set to catch up with senior unsecured supply after having trailed in the first full week of the year. He noted that in contrast to a more balanced start to 2014, senior unsecured had dominated the start of 2015, with around Eu15bn of issuance versus just Eu1.25bn of benchmark covered bonds in euros.

Another banker said that he was surprised to see a Spanish mandate be announced at such an early stage in developments.

“It will be interesting to see how the Spanish stuff is going following the fiasco they went through with Santander late last year,” he said.

The last Spanish benchmark to hit the market was a Eu3bn dual tranche issue for Santander on 12 November, which was split into Eu1.75bn 10 year and Eu1.25bn 20 year tranches priced at 23bp and 43bp over, respectively. That deal – one of the largest ever – widened in the aftermarket and market participants attributed its poor performance to both its execution and the overall market taking a turn for the worse as the CBPP3 momentum that had until then sustained aggressive pricing died out.

According to a syndicate official away from BBVA’s leads, the 10 and 20 year tranches were today trading at 30bp and 53bp over, respectively.

“It will be interesting to see how the new issue premium will be after the widening of Santander,” he said.

He suggested that a re-offer spread of 25bp-27bp over would make sense. Another said he expected a level around the mid-20s, noting that a Eu1.25bn seven year Banco Sabadell deal issued on 31 October is now at around 24bp, bid.

“I would assume BBVA can come a little tighter than Sabadell,” he said, “but not a lot, and maybe even 25bp is a bit aggressive.”

He also noted a BBVA January 2028 issue bid at around 16bpp over.

“I would assume that they would rather start on the generous side,” he added.

Another banker said that other issuers would be looking at the new issue and any others for clues to how Eurozone deals should be approached.

“Since the start of the year issuers have been wondering how new issue premiums will pan out and they are very eager to see this for a European issuer rather than Westpac from Australia,” he said.

Syndicate officials at Westpac’s leads put its new issue premium at around 4bp, saying this reflected the higher new issue premiums prevailing in the wider markets, although one noted that the NIP was only 1bp more than that paid on Westpac’s last seven year covered bond in March 2014.

Germany and Austria were allocated 42% of the new issue, the Benelux 15%, the UK 14%, the Nordics 7%, Asia 7%, Switzerland 3%, France 1%, other Europe 5%, and others 5%. Central banks and official Institutions took 32%, fund managers 33%, banks 20%, insurance companies and pension funds 12% and private banks 2%.

“Official institutions continue to provide increasingly meaningful participation in Australian covered bonds,” said the syndicate official.

The order book totalled around Eu1.7bn, comprising 90 accounts, which allowed the issuer to increase the size from its original expectations to Eu1.25bn, he added.