Banco Popular Español faced a challenging backdrop when issuing a Eu1bn 10 year cédulas yesterday (Tuesday), but nevertheless got its transaction away in a market offering historically low levels and with a more modest new issue premium than some had argued, according to a lead syndicate official.

The mandate for the Spanish bank’s issue was announced early Monday afternoon and surprised some market participants given that a Eu1bn 10 year CaixaBank issue had fallen short of expectations last Wednesday.

However, the lead syndicate official said that although the market was slightly softer on Monday there were hopes that the correction of the past week or two had passed and that this week might show more stability.

“Unfortunately, that was not the case,” he added.

He said that the market was weaker during the Monday afternoon session and then again on Tuesday morning. But he said that upon reassessing the situation the issuer and leads believed that they would be able to get a deal away successfully, thanks in part to the underlying technicals supporting covered bonds, and considering that a Eu1bn 10 year Bankia issue two weeks issued two weeks ago (11 March) had attracted almost Eu3bn of demand.

“We felt that everything could not have faded away,” he said.

They also considered that, in offering a higher spread and better relative value to government bonds, Banco Popular would not face the difficulties encountered by CaixaBank, which priced its deal at 15bp over mid-swaps.

“So all in all, and offering an appropriate new issue premium, we decided to move ahead,” said the lead syndicate official.

Leads BAML, Banco Popular, BBVA, Crédit Agricole and Natixis went out with IPTs of the low 50s over mid-swaps and then moved to 50bp-52bp over after having taken Eu1bn of IOIs. They then fixed the re-offer at 50bp on the back of some Eu1.25bn of demand, excluding joint lead manager interest, with around 80 accounts participating.

The lead syndicate official said that bookbuilding began slowly, given the poor market opening, but then picked up as the market stabilised.

Regarding the new issue premium, he said that Bankia’s 10 year was the most appropriate recent comparable and that this was at 39bp, mid, or around 41bp, bid, yesterday morning, wider than a level of 36bp, mid, at which it had been seen on Monday afternoon, in line with the broader market weakness.

He argued that Banco Popular should come 6bp or more wider than Bankia in the 10 year part of the curve given that in the 2019 maturity Popular was trading 6bp wider than its peer. Adding 6bp to the bid side of Bankia’s 10 year gave a spread of 47bp over, suggesting that the new issue premium could be 3bp, although he characterised it as having been possibly 3bp-5bp.

Market participants who had yesterday said that the new issue premium was 10bp or higher acknowledged that – contrary to some of their earlier assumptions – market levels – including CDS – implied that Bankia is viewed as a better credit than Popular and that its cédulas can trade tighter, even if they saw the covered bond ratings as being in Popular’s favour – its issue is rated Baa1/AA by Moody’s and DBRS, while Bankia’s is rated Baa3/A/BBB+ by Moody’s, S&P and Fitch.

However, they were sceptical about the differential being worth close to the 6bp implied by the 2019 paper, with one also saying that he saw the spread between the two 2019 issues as being smaller and noting that Bankia’s issue is three months shorter.

“Our best take is that the covered bonds of both banks are rather comparable,” he said, “which is also reflected by the fact that they are trading close to each other.”

Another pointed out that the main Bankia comparable is a September 2025 issue, five months longer than Popular’s, and that the curve is worth a couple of basis points – although he admitted that the interpolations were open to interpretation – while some market participants also judge new issue premiums against mid rather than bid levels.

On this basis, they said that the new issue premium might instead have been in the high single-digits rather than a double-digit spread.

“The truth is probably somewhere in between,” he said of his previous double-digit estimate and the leads’ level.

Some other market participants, meanwhile, were closer in their calculations to the leads.

The lead syndicate official, despite disputing the higher estimates, agreed that the new issue premiums being demanded are “substantial”. He said that some issuers are therefore waiting to approach the market, but noted that issuance across the capital spectrum and away from banks showed that many issuers are keen to proceed.

“From an issuer’s perspective, we are still at historically low rates and spreads,” he said. “And Banco Popular was able to get its deal done in a window ahead of possible uncertainty ahead.”

Germany and Austria were allocated 31% of Banco Popular’s issue, Spain 22%, the UK and Ireland 15%, the Benelux 7%, Italy 7%, France 5%, Switzerland 3%, the Nordics 3%, Portugal 2%, and others 5%. Funds took 47%, central banks 32%, banks 19%, and insurance companies 2%.