F van Lanschot Bankiers priced its first benchmark covered bond yesterday (Tuesday), a Eu500m seven year conditional pass-through issue, and an official at the Dutch bank said that the attractions of the instrument have risen relative to RMBS, while the CPT structure was surprisingly widely accepted.

Ralf van Betteraij, manager, treasury funding management, at Van Lanschot, said that the deal went smoothly. It was launched after a roadshow that ran from 10 April until last Friday.

“We came back into the office yesterday and gathered some final feedback, and announced that the transaction would be launched in the near future,” he said. “Some days last week were a bit bumpy, but that was more in the senior and capital space, while covered bonds still did well. Obviously you had Grexit as one of the key themes, but at the start of this week the market was OK – equities were in greenish territory – so today provided a solid base for execution.

“We opened books this (Tuesday) morning just after 9am, and it all went very well.”

Leads BNP Paribas, Credit Suisse, LBBW, Natixis and Rabobank went out with initial price thoughts of the 5bp over mid-swaps area for the Eu500m no-grow seven year issue, then moved to guidance of the 3bp area after having gathered IOIs of over Eu1bn. They then set the re-offer at 1bp on the back of Eu1.3bn of orders, with the book ultimately reaching Eu1.4bn, comprising over 70 accounts.

“All in all it was a good execution,” said van Betteraij, “with a really high quality book and good granularity.”

The re-offer was the same as that paid by NIBC on a Eu500m seven year CPT covered bond on Thursday of last week, with market participants suggesting that while Van Lanschot was perceived as a better credit, it had to pay a premium for the inaugural nature of its trade, and van Betteraij acknowledged this.

“On the one hand, there is something like an inaugural premium,” he said. “On the other hand, we felt – and we heard from investors during the roadshow – that we are viewed as a different kind of credit from NIBC – not only in terms of rating, but also business model. What was also good feedback was that they like to see diversification in terms of issuers – new kids on the block are very welcome.

“But then it all comes down to what kind of basis point numbers you put on the credit differential versus the inaugural premium. It was also definitely not our intention to squeeze every basis point out of the transaction – we just wanted something that was acceptable for us and offered a pick-up for investors.”

He noted that some investors switched out of other Dutch names into Van Lanschot’s new paper to capture some extra pick-up.

Fund and asset managers were allocated 34% of the issue, banks 31%, central banks and official institutions 23%, insurance companies and pension funds 6%, and others 6%. Germany and Austria took 27%, the Benelux 27%, the Nordics 17%, the UK and Ireland 10%, Switzerland 4%, Italy 3%, Spain and Portugal 3%, Asia 4%, and others 5%.

Van Betteraij said that investors met with during the roadshow had proven more receptive to the conditional-pass through structure than expected.

“Also I knew that Germany was a bit traditionally, more Pfandbrief-oriented,” he said, “but we had one or two very well known, sophisticated investors saying: ‘Well, I had second thoughts about my soft bullet exposure. I really like the feature in CPTs where you have an orderly wind-down of the portfolio after an issuer event of default, whereas in traditional covered bonds I could end up accepting a haircut on my investment because a super-majority of other bondholders is accepting that certain haircut.’

“Obviously that also depends on the nature of your liabilities as an investor, but if you are not that concerned by slightly delayed but full repayment, if you are comfortable with that timing, then you can easily accept the CPT feature, whereas some investors due to the liability nature of their balance sheets just need payment on certain dates and they stick to hard bullets. But overall the acceptance of the product is definitely increasing.”

Van Lanschot is the third issuer, after NIBC and Italy’s UniCredit, to have used the CPT structure on a legislative benchmark covered bond, while other issuers have been switching from hard to soft bullet structures.

“What is also interesting is that some investors said ‘I really understand why banks are opting for this’ and they expect to see more issuers moving from hard to soft – as seen with ABN and Credit Suisse – and from soft to pass-through,” said Van Betteraij. “So sometimes we had interesting meetings where investors were really comfortable on Van Lanschot and on the instrument, and we just chatted about where the market would go and how they view the instrument going forward.”

Van Lanschot itself intends to be a regular issuer, according to Van Betteraij.

“We have just below Eu1bn of secured funding maturing this year – assuming a call of outstanding RMBS in August – and have highlighted that this year we will only partly refinance that secured funding,” he said. “But we have ambitions to be in the market on a regular basis and we have very clearly indicated to investors that we didn’t spend all the time, money and effort on the programme only to launch one issue.”

The secured funding referred to by Van Betteraij is issuance off its Citadel RMBS programme, and he said that the relative attractions of covered bonds versus securitisation have increased.

“We have been active in the RMBS space and that instrument has served us very well,” he said, “and we are happy with the funding mix we have in general. It is then a question of which instrument provides the best execution going forward, which gives us the flexibility to do a transaction when we would like to.

“The time to market for a RMBS transaction is at least four to five months, but by setting up a covered bond programme you can enter the market much more flexibly. And in the last couple of years we have seen that the windows are not there for too long, so it is really handy to have an instrument with which you can pick your windows.”

The investor dynamic has also evolved in favour of covered bonds, he said.

“In various dialogues we have had over the last 18 months with investors in the ABS space, it was our impression that the investor base for ABS is shrinking,” said Van Betteraij. “Meanwhile, we saw more green lights on the dashboard for covered bonds: with insurance companies that have to meet Solvency II requirements, for example, but also for bank treasuries where for LCR treatment being Level 1-eligible is key.

“So we have observed a way broader investor base for covered bonds and that is really the main reason why we have put a covered programme next to our RMBS shelf. It is not a final goodbye to RMBS, I would say, but it is about having an instrument available that at this very right moment provides smoother execution compared to RMBS.”