PKO Bank Hipoteczny is set to inaugurate Polish benchmark euro covered bond issuance, having today (Thursday) mandated a roadshow for a debut, and bankers expect a strong reception given the deal’s anticipated pricing and strong features of Poland’s product.

The issuer – the mortgage bank of PKO Bank Polski – this (Thursday) morning announced a mandate for a European roadshow ahead of a potential fixed rate euro benchmark covered bond with a medium maturity, to be backed by zloty-denominated mortgages. The roadshow will commence on Thursday of next week (6 October) and conclude on 12 October. Deutsche Bank, JP Morgan, LBBW, PKO Bank Polski and Société Générale are the leads, with SG also global coordinator and lead co-arranger of PKO Bank Hipoteczny’s covered bond programme.

The mandate announcement follows the approval of the base prospectus of the Eu4bn European covered bond programme yesterday (Wednesday).

“The programme allows us to offer covered bonds to qualified investors in the European market, where we have seen a strong demand from fund managers, banks and insurance funds for covered bonds,” said Rafał Kozłowski, CEO of PKO Bank Hipoteczny. “Through the programme, we can expand and diversify our base of investors with those potentially interested in obtaining our covered bonds.”

Bankers at and away from PKO’s leads said it is difficult to estimate fair value for the debut euro issuance, given a lack of comparables, but said the most appropriate approach is to derive pricing from the Polish sovereign curve.

Referring to the most recent Polish government euro-denominated covered bonds, bankers saw October 2021s at 25bp over mid-swaps, mid, and September 2025s at 41bp. Bankers noted that some older, higher coupon Polish government bonds were trading at 100bp and above in the five to seven year part of the curve, but said these were less useful comparables.

“The best way is to compare the Polish jurisdiction to core and semi-core jurisdictions in terms of the pricing derivation versus govvies,” said a syndicate banker at one of the leads. “It’s not like, for example, Italy or Spain, where covereds are pricing deeply inside the government curve.

“With the changes to the law, this is a high quality product that is really comparable with issuance from the core and semi-core jurisdictions. Dutch conditional pass-throughs (CPTs) and Irish ACS provide the best hint.”

Polish covered bonds feature CPT structures, following an update to the country’s covered bond law in January.

The lead banker suggested that the pricing differential between Dutch CPT covered bonds and the Dutch sovereign provides the best approach to interpreting fair value, noting that Dutch CPTs tend to offer a pick-up of around 15bp-20bp versus govvies. He noted that Irish covered bonds, which like PKO’s issuance are rated Aa3, also trade around 15bp-20bp above the underlying sovereign.

“I think then that this new issue should come 15bp-20bp above the Polish sovereign, maximum,” he said. “Due to the higher yield that will be on offer compared with the other euro covereds right now, I think investors will be pretty keen on this deal.

“I expect that will drive the difference between this inaugural trade and Polish govvies down to a minimum.”

Bankers away from the deal said they also expect it to generate interest among investors, thanks to its rarity value and the lack of higher yielding paper on offer.

“There are some signs in the wider market that the tide is turning and investors are being a bit more selective, despite still having plenty of cash,” said one. “However, the pipeline is still quite slim in covereds, and anything with yield and a non-ridiculous price should work.

“It is a good time to open a new market.”

While some investors continue to avoid buying CPT covered bonds, bankers said they do not expect the deal’s structure to prove an obstacle.

“There’s a few guys out there who ‘um’ and ‘ah’, or just can’t buy CPTs, but there should be more than enough demand to get the deal done,” said a syndicate baker. “This obviously won’t have the ECB bid, unlike those that have come before, so maybe we’ll have to see how it works – but I don’t think the CPT structure will stop many people from buying.”

Moody’s assigned the covered bonds a provisional rating of Aa3. The rating agency noted this is in line with the rating of PKO’s zloty issuance, but added that it has lowered the Timely Payment Indicator (TPI) for PKO’s covered bonds from “probable-high” to “probable”. The change was prompted by the issuance of the euro-denominated covered bond, which, Moody’s said, introduces the risk of currency mismatches following an issuer default.

“The issuer plans to mitigate currency risk with a swap which will not cover the pass-through period that comes into effect if, after a hypothetical issuer default, the covered bond is not repaid at the end of the initial one-year extension period of its maturity,” said Moody’s. “Repayment before activation of the pass-through period could take place, either (i) in accordance with terms and conditions of the bond at the extended maturity date provided the legal tests are met or (ii) via a sale of assets by the receiver on the back of a two thirds majority vote from bondholders.

“During the pass-through period, there is a risk that currency mismatches reduce the value of the cover pool, negatively impacting the covered bond estate’s ability to make timely payments on the covered bonds.”

Moody’s added that the lower TPI does not constrain the covered bond rating, with the constraining factor continuing to be the country ceiling for Poland.

PKO Bank Hipoteczny sold a zloty-denominated debut in April, a PLN500m (Eu117m) five year issue, which was the first benchmark Polish covered bond since the update to the covered bond law. The issuer sold a second zloty benchmark in June.