An inaugural, $500m (Eu452m) five year deal yesterday (Tuesday) from SumitG Guaranteed Secured Obligation Issuer DAC, a secured funding vehicle established by Goldman Sachs with joint guarantor Sumitomo Mitsui, achieved pricing on a par with a recent triple-A Kookmin Bank legislative covered bond.

The new issue comes more than a year after Goldman Sachs went public with a previous, similar project for FIGSCO (fixed income global structured covered obligations) Issuer Ltd. No FIGSCO deal ultimately emerged, but the new SumitG project is effectively a more straightforward version of the previous initiative with more transparency on the collateral, according to market participants.

Eldar Mezbur, head of covered bond origination at Goldman Sachs, noted that the joint and several guarantee of SumitG bonds from Goldman Sachs Group (A3/A-/A) and Sumitomo Mitsui Trust Bank (A1/A/A-) (which plays the corresponding role of Mitsui Sumitomo Insurance Company in FIGSCO) is direct, whereas in FIGSCO it involved an intermediary step with total return swaps. The issuer itself is an Irish SPV.

“From a guarantee point of view, it is not dissimilar, but easier to understand,” he said.

Investors also benefit from a preferential claim over a portfolio of fixed income assets, which initially comprises RMBS. SuMi Trust Bank provides 55% of the assets in the collateral pool and Goldman Sachs International a 45% share – with proceeds split likewise – whereas in FIGSCO Goldman was responsible for the entire collateral.

Line-by-line information will be provided on the collateral, with monthly reporting to investors, and Deloitte acting as an external asset monitor. The collateral can also only include marketable fixed income assets and initially it comprises seven RMBS deals, from Japan (46%), Italy (30%), Portugal (15%) and the Netherlands (9%). A minimum overcollateralisation (OC) level of 10% has been set, and assets rated lower than double-A require higher OC.

Mezbur said that the transaction allows the two guarantors to benefit from not only cheaper funding, but, importantly, to tap into rates investors. Meanwhile, the arrival of such an instrument at a time when covered bond outstandings have been shrinking – and a large chunk has been taken out by the ECB under CBPP3 – makes a lot of sense, he added.

Moody’s and Standard & Poor’s have assigned SumitG ratings of Aa2/AA+, which are based only on the joint and several guarantee. However, should pending planned changes to S&P’s methodology be implemented, its rating would probably be cut from AA+ to AA-, the rating agency has said.

Leads Goldman Sachs, BNP Paribas, Crédit Agricole, Natixis, NCB Capital and UBS launched the debut, $500m five year soft bullet Reg S/144A issue yesterday with initial price thoughts of the mid-swaps plus 90bp area and priced it at mid-swaps plus 90bp.

“The level speaks for itself,” said Mezbur, noting that this is the same spread achieved by Kookmin Bank on a $500m five year issue on 14 October that was triple-A rated and the first deal under South Korean covered bond legislation.

Another banker noted that the pricing was towards the middle of where senior and more classic covered bonds trade in dollars, putting Goldman and Sumitomo senior paper at 110bp-120bp, and citing a RBC $1.75bn five year covered bond on 6 October that was priced at 72bp over mid-swaps. He said that SumitG had come roughly in line with where double-A rated senior unsecured paper of credits such as RBC, Rabobank and Nordea trades.

The deal attracted some $550m of demand at the 90bp level, according to Mezbur, with some 35 investors participating. Asset managers were allocated 35%, bank treasuries 27%, central banks and sovereign wealth funds 21%, insurance companies and pension funds 10%, private banks 5%, and others 2%. The Middle East took 26%, Switzerland 24%, the UK 20%, the US 10%, Scandinavia 10%, Asia 3%, and others 7%.

The issuance will not benefit from the preferential regulatory treatment of covered bonds, although Mezbur said that he expects SumitG to be included in covered bond indices, given that issuance such as Kookmin Bank’s previous contractual issuance, a Commerzbank SME structured covered bond, and Swiss structured covered bonds have been able to achieve eligibility. He said that he expects greater participation from investors in future issuance.

Mezbur said that SumitG will hopefully become a regular issuer, and he expects the reception afforded the first deal to have piqued the interest of other financial institutions.

“Has it proven that the concept works? Absolutely,” he said. “The reality is that other banks, especially given the level, may look at this, for example investment banks that don’t originate the mortgage assets typical of covered bonds.”