CFF issued one of the tightest ever non-German benchmark covered bonds yesterday (Tuesday), a Eu1bn five year issue priced at 8bp through mid-swaps, with an official at the issuer attributing the deal’s success to both recent and longer term developments.

Leads Crédit Agricole, Mediobanca, Natixis, RBS and UniCredit priced the Eu1bn no-grow issue at 8bp through on the back of a Eu2.7bn total order book after having gone out with initial price thoughts of the mid to low single-digits through mid-swaps and then guidance of the minus 6bp area on the back of Eu1.8bn of indications of interest, according to a syndicate official at one of the leads. He put the new issue premium offered by the deal at around 1bp, while the book is the largest for a benchmark covered bond this year.

The deal is understood to be the second tightest ever non-German benchmark covered bond after a Eu1bn deal from Compagnie de Financement Foncier (CFF) in May 2007 that came at 10bp through mid-swaps, although that was only a two year issue and CFF’s new issue is the tightest non-German in any longer maturity. The coupon on yesterday’s transaction is also understood to have been the second lowest on a non-German benchmark covered bond, at 0.125%, again behind CFF’s two year in 2007.

Michelle Kornbluh, head of public issuance at CFF, cited several factors in the deal’s success.

“One of the big factors is that there is still a tremendous imbalance between supply and demand,” she said. “There’s just not that much coming out in the covered bond space right now.

“Clearly CBPP3 is drying up the market, in secondary and also taking a chunk out of primary deals,” she added, “and that also contributes to the supply-demand imbalance.”

Kornbluh also highlighted the supportive regulatory environment.

“We continue to see a number of bank treasuries in the order books, institutions that I suspect are still working on their LCR portfolios,” she said. “They clearly want high quality liquid paper for that and we’ve shown that spread-wise and liquidity-wise we are still right up there – to the extent that you can talk about liquidity in the market today.

“The deal really testifies to the strong acceptance of our signature in the market,” she added. “All the investor work we have done over the years and our degree of transparency in our communications with investors shows them where we are and where we expect to be going, and that’s also been very supportive of our name in the market, and we hope to continue this way.”

CBPP3 buying of the new issue was included in distribution statistics under a broad Eurozone category, which was put at 59%, and within central bank and official institutions, with 45%. Meanwhile other Europe was allocated 22%, Asia 12%, and others 7%, while banks took 33%, asset managers 16%, corporates 3%, and insurance companies 3%. Some 100 accounts participated.

“If you leave out the Eurosystem – which came in for a reasonable chunk, although smaller than last year – we had very nice granularity,” said Kornbluh.

“I think the five year worked out to be a very nice sweet spot,” she added. “We got very good demand from central banks, not just from the Eurosystem, but also from other central banks from Europe, Asia, central Europe and the wider Middle East area. I saw names from the central bank space that, after five years of doing funding at CFF, I’d never seen in our book before.”

She also noted that the breadth of demand, including good participation from Germany, reflected the relative value again being seen in covered bonds.

“With QE, the performance of government bonds has in relative value terms definitely brought some juice back into the covered bond market,” said Kornbluh. “That’s probably where the big shift has come compared with the beginning of the year.”

CFF’s new Eu1bn five year deal comes after the issuer sold a Eu1bn 10 year on 12 January, a Eu1.5bn seven year in November, and a Eu1bn five year just after CBPP3 was announced in September. It has now launched six euro benchmarks in the space of a year, having also sold Eu1bn five and 10 year deals in March and April 2014, respectively.

“We are trying to get ahead in our funding programme for 2015,” said Kornbluh. “It’s always hard to predict what the rest of the year is going to look like, so we’d rather move forward when the market context is favourable and supportive.

“There’s still a lot of uncertainty out there – with Greece and other geopolitical concerns – so we are moving ahead while the markets are good so as to not get caught if sentiment shifts at some point.”