Issuers and syndicates should be careful not to overly squeeze pricing in an “issuer’s paradise”, market participants agreed on a panel at the ICMA CBIC/The CBR conference last Thursday, but bankers said investors also bear some responsibility for the frothiness of the market.

Speaking at an ICMA Covered Bond Investor Council (CBIC) and The Covered Bond Report conference in Frankfurt last Thursday, market participants discussed the recent evolution of issuance dynamics, and bankers were generally positive about the state of the market.

Citing issuance volumes up around 50% year-on-year, Armin Peter, global head of debt syndicate at UBS, said the covered bond market is in good shape.

“Talking about what does work and what does not work,” he added, “I’d say the covered bond market is still a sunny island.”

However, Andreas Denger, CBIC chairman and senior portfolio manager and analyst at MEAG, said he is not happy with the way the market is behaving, with conditions not so positive for the buy-side.

Regarding the primary market, he criticised the process typically used by issuers and lead managers to find the price for new issues. He noted that the procedure of going out with initial price thoughts was developed when the market was in a severe crisis, and added that, with the Eurosystem buying substantial shares of Eurozone issues through CBPP3, the fear of bonds failing to sell at a fair price is unrealistic.

Denger suggested it would now be more appropriate if issuers and their leads announced deals with a fixed range from the start, within which the deal would be priced.

“What I would like to see is a more realistic and maybe more reliable bookbuilding,” he said. “For an investor, it is not very easy to manage a book that opens at an often ridiculously high level – where you know the bond will never, ever price – and then when the books are booming, it turns out the deal will be sold with next to no discount.

“I’m not saying the final price is the wrong price – I’m just wondering about the process.”

Peter said it is appropriate that deals are not launched immediately with the minimum price the issuer would accept, and that the price is negotiated.

“We can discuss the starting point, but we also need to look at the investor community and understand if they are being stringent enough,” he added. “Investors are still buying at these levels because they don’t want to miss the opportunity. People need to buy bonds.

“In a low or no yield environment, you’re probably not getting paid properly for the risk you’re taking.”

Denger replied that investors do often place limits on their orders, but are sometimes forced to buy bonds at unsatisfactory levels, with the secondary market also squeezed as a result of ECB buying.

“Sometimes we have to accept, but I think it is not right,” he said. “We are currently in a period where it’s an issuer’s paradise, with cheap money and huge demand in the market. But there will be a time when the ECB is not there every time a bank gets in trouble, maybe a time when there is higher reliance on real money investors. When this time comes, it is a good asset if there is a good relationship between issuers and investors.

“I’m not saying that every issuer is squeezing the last basis point, but there are a couple in the market where they are misusing the situation.”

In May, Denger and some other market participants criticised the execution of a Eu500m eight year cédulas for Caja Rural Castilla-La Mancha, after the deal was priced at 53bp over mid-swaps following guidance of 57bp, plus or minus 2bp (which followed IPTs of the low 60s).

Panellists agreed that deals should be priced within their stated range.

“Price in range means price in range, and I have every respect for those that were dropping out,” said Steffen Dahmer, executive director – global product manager for covered bonds at JP Morgan. “We have an issuer’s market, and issuers take advantage of that, but they should not overrun it and squeeze the last basis points.

“There were times when investors had the advantage, and these times come and go. It becomes an even match.”

Peter said that one way to refine the pricing process would be if investors were more transparent in limiting their orders, providing more clarity to issuers as well as syndicates. He also said that in many cases issuers are advised to allocate smaller shares of new issues to the ECB but do not do so.

Denger suggested that the ECB should also not place orders regardless of price, given that central banks are provided the same data as other investors and are therefore able to carry out credit analyses.

Responding to a question from the audience, Peter said another way to counter this would be to remove from the final book any orders that drop out when a deal’s price is revised, and said discussions were already taking place regarding this. Panellists disagreed over the extent to which this already takes place.

“In 60% of cases it is like this,” said Peter, “but not in all.”

David Power, vice president, corporate treasury, at Royal Bank of Canada, added that the amount of price movement typically observed in euro markets is much less than the US dollar markets, in which the Canadian bank carries out around half its wholesale funding.

“A lot of this is stemming from frustration with monetary policy,” Power said. “Monetary policy has effects for our broader organisation, which are not necessarily positive.

“It’s not just real investors that are suffering.”