A Bank of Ireland funding official said granular and high quality demand yesterday (Wednesday) led the issuer to size a seven year deal at Eu1bn on the back of a Eu1.1bn book, and described the result as a strong outcome given a volatile backdrop, which bankers said could affect supply.

Leads BNP Paribas, Citi, Credit Suisse, Davy and UniCredit launched the seven year deal with a euro benchmark size as a starting point and initial price thoughts of the 7bp over mid-swaps area, before setting guidance at 6bp having gathered Eu1bn of orders. The re-offer spread was then set at 5bp, at which point the leads and the issuer decided to size the deal at Eu1bn, before the books closed at Eu1.1bn.

Bankers away from the deal noted what they considered to be a relatively slow execution, with some citing wider market weakness as a possible factor.

Darach O’Leary, head of wholesale funding at Bank of Ireland, acknowledged that “as the morning developed, it became clear that yesterday wasn’t the ideal backdrop”.

He noted that when the transaction was announced October 2020 Irish government bonds were seen at flat to mid-swaps and March 2022s at 1bp over. These two references widened through Wednesday in line with the broader weakness in sovereign yields, according to O’Leary, with the October 2020s seen at around 3bp and the March 2022s at plus 5bp at the end of the day.

“There was a lot of rate volatility in the market today,” he said. “Considering the market backdrop, the high quality order book was evidence of a strong outcome.”

A syndicate official at one of the leads agreed, citing market conditions as the main reason why the deal was not as oversubscribed as other recent trades.

“The order book wasn’t the largest, but the fundamental focus is always order book quality and composition when sizing a deal,” he said.

The lead syndicate official argued that the high granularity of the order book justified the decision to print Eu1bn, rather than Eu750m.

“With a final book of Eu1.1bn, some could argue that maybe we should have printed a smaller transaction,” he said. “But the order book was of very high quality. Between the leads and the issuer, we decided that to print Eu1bn was the right thing to do.”

O’Leary agreed, adding that Eu1bn had not been the issuer’s target from the outset.

“Given the quality of the order book, we felt that Eu1bn was the appropriate deal,” he said.

Asset managers were allocated 41% of the deal, banks 30%, central banks and official institutions 28%, and others 1%. Accounts in Germany took 43%, the UK and Ireland 33%, Italy 9%, the Nordics 5%, France 4%, Switzerland 3%, the Benelux 2%, and others 1%.

O’Leary added that the deal should be judged in the context of Bank of Ireland’s other recent covered bond issues. He noted that the last seven year from the issuer was a Eu500m deal priced in October 2013 at 195bp over mid-swaps.

“That gives you an idea of the move in spreads that we’ve benefited from in the last 18 months or so,” he said. “So taking Eu1bn of seven year funding at plus 5bp is a very strong outcome given more recent covered bond transactions.”

The lead syndicate official added that the paper was being quoted 1bp tighter than the re-offer at the end of the day.

“So the proof is in the pudding,” he said.

Citing AIB February 2022s, seen pre-announcement at 2bp over mid-swaps, mid, the lead syndicate official suggested the deal offered a new issue premium of around 3bp.

Bankers said the wider market was weaker again today. One said the market did not seem to be recovering, and noted the Bund future is at 157.20, down from 160 five days ago. However, he said he did not expect this fall to continue, observing that a sell-off in sovereign bonds did not appear to have carried on into today.

“This was a big sell-off and it’s relatively big news, but it is not so surprising that this market would eventually take a break,” said one. “Now we have a pause day.

“The question is now whether the party will get rekindled when everyone is back at their desks next week.”

Another market participant said the market move may have longer term implications.

“It is the first time investors have suffered a big reversal since the start of QE and they may question whether they want to continue buying at these tight levels,” he said.

An analyst noted that the covered bond market had nevertheless remained resilient yesterday against the backdrop of the government bond sell-off.

“There were some sellers across jurisdictions in the 2016 to 2020 maturities, but the longer end remained well bid,” he said. “Overall, trading volumes remained modest, while spreads did not really move.”

Bankers said the conditions mean covered bond issuers and peripherals in particular are unlikely to rush to the market next week, with public holidays across Europe in the coming days also likely to subdue activity.

“It is something issuers need to bear in mind,” a syndicate official said. “People need to digest these moves. For now it makes sense for issuers to wait.”