Execution of a Banco de Sabadell Eu750m five year covered bond that lacked a possible 10 year tranche proved disappointing today (Friday), according to syndicate bankers, with the level of demand and pricing cited as potentially deterring other peripheral credits from issuing.

Leads Banco Sabadell, Barclays, Deutsche, HSBC and Lloyds launched the Eu750m five year Spanish covered bond with initial price thoughts of the mid-swaps plus low double-digits area. Guidance was then set at 12bp (the number) with IOIs approaching Eu750m, before the re-offer was set at 12bp and the size fixed at Eu750m. The size of the final order book was not disclosed by the leads when The CBR went to press.

Citing the lack of tightening of the spread and relatively slow execution, some syndicate officials away from the leads said the deal was not a positive sign for the market after a four week absence of new euro covered bonds from peripheral issuers. The last peripheral euro benchmark was a Eu1bn seven year from Bank of Ireland Mortgage Bank that was priced on 29 April at 5bp over, while the most euro benchmark from a Spanish issuer was a Eu1bn 10 year issue from Banco Popular Español, which was sold on 7 April at 50bp over mid-swaps.

“It looks to have gone pretty poorly,” said a syndicate official away from the deal. “I know there were a lot of peripheral issuers hoping that Sabadell would open the market with this trade, that were hesitant to go themselves, but this isn’t encouraging.”

The five year deal was announced yesterday (Thursday) with a 10 year tranche potentially being added to the deal dependent on investor demand. Bankers today said the decision to not launch the 10 year tranche shows there is currently little demand for longer dated peripheral paper.

“The demand for five years looks better,” said one syndicate official, “but it’s clear that the demand for a 10 year peripheral isn’t there, at least not at the levels Sabadell wanted.”

Another banker agreed, stating that some peripheral issuers may also face difficulties in pricing shorter dated deals.

“Even in shorter tenors, you need to look carefully at relative value for each jurisdiction,” he said.

The banker said Spanish issuers had a problem in particular because of the level at which Spanish sovereign bonds are trading. He saw Sabadell’s new issue coming 30bp through the Spanish sovereign.

“It is hard to say what needs to happen for Spanish issuers to be able to come forward again,” he added. “I’m not sure an extra 1bp or 2bp premium would make a difference. This might be a more systemic problem, and they might need to wait for yields to move.”

Some syndicate officials away from the deal saw fair value at around 5bp-7bp over, citing January 2018 Sabadell paper at around 3bp-5bp, bid, and its November 2021s at around 8bp-10bp.

“It wasn’t unusual for peripheral issuers to pay a premium of around 5bp before the recent volatility, but these aren’t bad levels,” said one.

But a syndicate official at one of the leads and other bankers away from the deal saw the 2018s at flat, bid, and the 2021s at 3bp, and implied fair value for the new issue somewhere between the two levels.

“I think this execution shows that investors are particularly price sensitive and are questioning the value of peripheral deals in this environment, especially from second tier names,” said a syndicate official away from the leads.

“But it at least shows us how the market is looking, and if you’re a peripheral issuer it tells you what sort of deal you can hope to do and what sort of levels you should aim for.”

Another banker away from the leads said that despite a difficult execution the end result was a good one for Banco Sabadell.

“It wasn’t the smoothest of trades, but in the end they’ve managed to do Eu750m at 12bp, which is certainly not a bad outcome, on the face of it,” he said.