BNS today (Thursday) found only modest demand for a Eu750m seven year issue that is the smallest Canadian euro benchmark, and bankers said the market may not be as straightforward as recent deals suggested. CIBC sold a £250m FRN that offered competitive funding despite wider sterling spreads.

Bank of Nova Scotia’s new issue, alongside a Eu1bn seven year for Bankia (see separate article), followed a wave of well oversubscribed euro benchmark deals, with most recent issues finding sufficient demand to substantially tighten spreads at slim premiums.

Bank of Nova Scotia leads BNP Paribas, Deutsche, HSBC, Scotiabank and UBS launched the seven year deal with guidance of the high 20s over mid-swaps, before revising guidance to the 28bp area on the back of over Eu700m of orders. The deal was then re-offered at 27bp and the size fixed at Eu750m ($814m, C$1.09bn), with the book over Eu800m.

The deal is the smallest ever euro benchmark covered bond for a Canadian issuer, with Bank of Nova Scotia previously having printed deals of Eu1bn-Eu1.5bn.

“It looks like they fell a bit short,” said a syndicate official away from the leads.

Bankers said fair value for the new issue was around 23bp, seeing BNS September 2021s at 21bp, bid.

“The starting point of high 20s did look a touch aggressive, given that it was only Friday that RBC started a euro five year at the 26bp area, and I think that was reflected in the slightly modest size of the books at the first update,” said another syndicate official away from the leads. “But going out with guidance of the 28bp area should have reassured investors that they are not going to the tightest possible spread.

“I think this deal shows that there is a difference in executability between five and seven year trades at the moment and things aren’t quite as straightforward has results have led us to believe. Seven years are clearly doable, but there is clearly more execution risk and higher concessions are required.”

Another syndicate official away from the deal said not much could be read into BNS’ result.

“This is the first deal we’ve had in a while where it feels like the books were short of what you’d expect,” he said. “I think the market still feels good.

“Maybe we will hit a bit of fatigue, but we might get a bit of a break with next week’s ECB meeting, so that could help.”

CIBC leads CIBC, HSBC and RBS launched the three year FRN with guidance of the low 50s over three month Libor area, before fixing the spread at 52bp on the back of over £200m of orders. The deal size was then fixed at £250m (Eu322m, C$470m) with the book closing at around £250m.

Syndicate officials noted that sterling spreads have widened since the start of the year, while deal sizes have been falling. Lloyds opened the market on 5 January with a £750m issue priced at 38bp, with further three year FRNs from Nordea, BNS and Toronto-Dominion each being priced wider than the last, until ANZ priced a £500m issue and RBC a £350m issue at 50bp, on 4 and 25 February, respectively. One syndicate official also noted that CIBC in January 2015 priced a £500m three year issue at 19bp over three month Libor.

“This is further evidence of the continual drip wider of re-offer spreads in the sterling market,” he said. “However, it also shows that issuers are still prepared to use this market due to the appealing funding levels it offers them.”

Syndicate officials said the sterling issue came 15bp-20bp inside where an equivalent US dollar deal would likely have been priced, and slightly inside an equivalent euro deal.

“Although these deals are getting smaller in volume and likely more difficult to execute, issuers will keep coming back to the market as long as it offers these kind of levels,” said the syndicate official.