Australia’s Macquarie Bank sold its inaugural covered bond today (Thursday), pricing a Eu500m five year issue with a spread deemed impressively tight to its more established peers. Westpac is meanwhile testing a dollar five year issue at a triple-digit spread against mid-swaps.

Macquarie’s debut had been anticipated since the Australian issuer established a A$5bn covered bond programme last year, and, following a European roadshow last week, the issuer announced a mandate for the deal yesterday (Wednesday) afternoon.

Leads Barclays, HSBC, ING, Macquarie, NAB and Société Générale launched the Eu500m (A$782m) no-grow five year issue with guidance of mid-40s over mid-swaps, before moving to guidance of the 42bp area on the back of over Eu800m of orders. The deal was then re-offered at 40bp.

“This is a very impressive debut,” said a syndicate official away from the leads. “They’ve got a very good price and put a good marker down for future trades.

“There haven’t been many trades this year where leads have been able to tighten the spread by 5bp.”

Syndicate officials noted that Macquarie trades with a slight pick-up to other Australian issuers in the senior unsecured market, reflecting its lower issuer ratings of A2/A/A (Moody’s, S&P and Fitch) versus Aa2/AA-/AA- for ANZ, CBA, NAB and Westpac.

However, they also noted that Macquarie’s covered bond programme, like those of the other Australian issuers, is rated triple A.

“Thanks to the triple-A rating the pricing differential shouldn’t be too big in covereds, but you would expect some pick-up for the credit differential and with this being a debut,” said one.

Syndicate officials disagreed on the exact pick-up that the new issue offered compared with outstanding Australian covered bonds, with some estimating that a new issue from one of the more established issuers would have been priced in the high 30s, seeing 2021 Australian paper at the mid-30s, mid.

“If we accept that the high 30s is around where an established Australian major would come in five years, then after starting 5bp or so back, Macquarie has come with a very modest concession to the majors – just 1bp or 2bp back,” said a syndicate official away from the leads.

“The size break is important, as the outstanding comparables are mostly Eu1bn trades and a Eu1bn Macquarie issue would probably have had to price 3bp-5bp back, so you’re not quite comparing apples with apples. But this is still an impressive price that sets up Macquarie very well.”

Other syndicate officials said the new issue had been priced closer to 5bp back from where an equivalent issue from one of Macquarie’s peers would have landed, seeing Australian five year paper quoted in the high 20s to low 30s, mid, but said this level was nonetheless a good result.

“It’s a great start,” said one, “especially for a debut not supported by the CBPP3 or ECB repo eligibility.”

Westpac Banking Corporation leads Citi, HSBC, Toronto-Dominion, and Westpac announced the 144A/Reg S five year issue with initial price thoughts of the 100bp over mid-swaps area.

Syndicate officials away from the leads said fair value for the new issue was around 95bp, seeing Westpac’s last dollar issue, a $1bn (A$1.40bn, Eu897m) five year priced at 80bp on 2 November, quoted at 92bp, bid. Only Korea Housing Finance Corporation (KHFC) and Kookmin of South Korea have launched dollar benchmark covered bonds since Westpac’s November issue.

“It’s an interesting test of the dollar market, as it’s quite a modest concession for an issuer that only came to the market relatively recently,” said one. “But 100bp represents a real rerack of spreads.

“A lot of investors will think of that as being more like a senior unsecured level, which may increase the focus around this deal.”

If priced in the middle of IPTs, the new issue would be the widest priced benchmark dollar covered bond since June 2012, when NAB priced a $1.25bn June 2017 issue at 100bp.

Syndicate officials said the 100bp spread over dollar mid-swaps was equivalent to three month Euribor plus 37bp. Some said the new dollar issue therefore offered slightly cheaper funding for Westpac than would have been achievable in euros, seeing the Westpac March 2021s at 34bp, mid and estimating that an equivalent euro issue would have been priced in the high 30s. Others, seeing the Westpac March 2021s at 31bp, mid, said the new dollar issue came roughly flat to euro levels.

Syndicate officials said that Westpac had been wise to prefer the dollar market to euros, given that Macquarie’s deal had been expected for some time and that Westpac would have looked to print a euro deal inside the inaugural issuer.

Fitch said today that it expects Australian covered bond issuance to increase in 2016, up from A$14.3bn equivalent in 2015 to between A$16bn and A$17bn. The rating agency said this reflects the refinancing needs of Australian issuers over the next 18 months.