Westpac gave an indication of the new issue premiums that will be required of issuers seeking real money demand with the first euro benchmark of the year today (Thursday), a Eu1.25bn seven year that bankers said was successful partly thanks to the issuer erring on the generous side.

The Australian issuer’s euro benchmark is the first since Italy’s Cariparma sold a Eu1bn long seven year deal on 3 December. Although the wider bond markets were busy this week in SSAs and financial institutions, and three transactions hit the sterling covered bond market in the first three days of the week, euro covered bond activity was absent, partly thanks to public holidays in many parts of Europe on Tuesday.

The mandate for Westpac’s deal was announced yesterday (Wednesday), with launch expected today, and leads BNP Paribas, JP Morgan and UBS went out with the new issue this morning. Initial price thoughts were the high teens over mid-swaps, and the leads then moved to guidance of the 16bp area before fixing the spread at 14bp over mid-swaps and sizing the deal at Eu1.25bn (A$1.84bn)
on the back of a book of some Eu1.8bn.

A couple of syndicate bankers away from the leads considered the IPTs to have been on the generous side. One said that with Westpac March 2021s at around 8bp over and Australian 2022 paper trading at around 10bp over, the IPTs reflected a new issue premium of around 8bp.

“We were a bit surprised at how cheap they came,” said the first syndicate official, “even with the semi-bearish tone out there.”

He also considered the final pricing of 14bp over – which he said gave a new issue premium of around-3bp – as 2bp wider than where he would have expected, and another banker echoed this. He suggested that the wider than expected pricing could be partly explained by some recent Australian and Canadian deals having traded unpredictably after pricing, the result of some deals being sized too large relative to book sizes.

However, other bankers said that while the IPTs looked generous, the ultimate pricing was in line with their expectations, and even those who said it was wider than they had expected thought that the outcome was positive.

“It’s an untested market and they wanted to make sure it was sold,” said one. “Someone had to open the door and Westpac was brave enough to do so, so kudos to them.

“It’s good that we now have a first trade out there that has crystallised where new issue spreads are relative to secondaries.”

Another banker agreed.

“They managed to tighten the spread quite a bit to the right level and it has gone very well,” he said. “It shows that the euro covered bond market is in good shape as long as issuers take a sensible approach.”

This would involve higher new issue premiums than were paid at the end of last year, according to another syndicate official, particularly for Eurozone paper eligible for CBPP3.

“The last Eurozone deals at the end of last year were almost all nightmares,” he said, “not working properly and widening. It was all priced flat to the envisaged ECB bid and nobody looked at secondaries or real investor demand.

“If Eurozone issuers are looking at today’s deal closely they will witness the return of the new issue premium and I hope they will follow today’s example: you need to put something on the table to make sure a deal works. But it remains to be seen if they will accept this or bet on central bank demand and hope to find buyers for the remainder.”

While bankers would not rule out a deal coming tomorrow (Friday), issuance next week is considered more likely.

“There will be a lot of activity next week, from the usual suspects in France and Germany,” said one. “We had the holiday on Tuesday so the second week is the first full one and the only week before the ECB makes its new announcements and before the elections in Greece.

“So I think a lot of issuers will decide to come to the market next week and to use the window, which is now pretty wide open.”

Bank of Nova Scotia has meanwhile mandated UBS, ANZ and Westpac alongside itself for a five year Kangaroo covered bond, which is set to be the first Australian dollar issue of the year.