AIB sold a Eu1bn seven year issue today (Thursday) that bankers said benefitted from a pick-up versus the Irish sovereign and positive rating developments for Irish banks, adding that the spread was impressive relative to recent peripheral issues. Meanwhile, KSK Köln sold a Eu250m eight year issue.

AIB Mortgage Bank’s issue is its largest benchmark covered bond since at least the onset of the financial crisis in 2007.

It is the first benchmark Irish covered bond since 12 October, when Bank of Ireland Mortgage Bank priced a Eu750m five year issue. Syndicate officials noted that recent euro benchmark covered bond supply has mostly come from core or semi-core issuers, with the last peripheral deals sold on 13 January, when Deutsche Bank SAE and Santander priced cédulas.

Leads Commerzbank, Goldman Sachs, UBS and UniCredit launched the Irish seven year issue with initial price thoughts of the high 50s over mid-swaps, before moving to guidance of 55bp plus or minus 1bp after having taken over Eu1.25bn of orders. The size of the deal was then set at Eu1bn and the spread at 55bp, on the back of books of Eu1.6bn.

Syndicate officials saw fair value for the new issue at varying levels. Some said the deal offered a premium of 6bp-7bp, seeing AIB 2022 paper quoted at around 43bp, mid. Others said the premium was closer to 9bp, citing AIB March 2021s at 39bp and February 2022s at 41bp.

Syndicate officials said, however, that the deal would be assisted more by its pick-up relative to the sovereign than AIB’s curve, seeing early 2023 Irish government bonds at around 7bp.

“That is quite a significant pick-up versus the sovereign, and that for a well rated deal,” said a syndicate official.

AIB Mortgage Bank’s covered bonds are rated Aa1 by Moody’s, AA+ by S&P and A+ by Fitch.

“This deal is benefitting from a pretty high degree of rating uplift given the recent improvement in Irish banks, which I think if you like could be considered semi-core now, arguably,” said the syndicate official. “Seven years hasn’t been the maturity of choice, with the best of the recent deals focussed in fives, but this deal benefits from the Irish halo effect and that pick-up versus the sovereign.”

Syndicate officials away from the deal said AIB’s issue would be encouraging for other Irish credits.

“This is a great sign for Ireland,” said one. “The whole market has widened since last year, obviously, but if you look where recent peripheral deals have come and where Irish banks used to come in the past, this are comparatively low levels.”

However, another syndicate official said issuers from other peripheral jurisdictions will likely wait for better conditions before entering the market.

“I think most peripheral issuers will want to see more of an improvement in their spreads before they come to the market,” he said. “To be honest, I hope they do – we don’t need any 20 year cédulas with 20bp premiums coming along and resetting curves again.”

After Kreissparkasse Köln announced a mandate for its sub-benchmark yesterday (Wednesday), leads BayernLB, KSK Köln, LBBW and WGZ opened books for the Eu250m eight year Pfandbrief with a fixed spread of 6bp at 9:15 CET, then closed the book at 10:45.

“These deals are not always easy but this went well and very quickly,” said a syndicate official at one of the leads. “It was fully sold and there was more demand but we stopped at the Eu250m size.”

The lead syndicate official said the leads decided to launch the deal with a fixed spread after taking feedback from investors yesterday afternoon. He said fair value for the new issue was around 3bp, seeing KSK Köln March 2022s at minus 1bp, mid, and May 2023s at 2bp.

The lead syndicate official added that the deal was mostly distributed to the savings banks network and the Eurosystem.

Photo: AIB