Poland’s covered bond market has big growth potential following the sale of a euro debut by PKO Bank Hipoteczny on Monday, according to the issuer’s CEO, who cited “special” interest from CEE accounts and room for increased bank treasury involvement as evidence of the region’s fertile ground.

PKO Bank Hipoteczny’s Eu500m (PLN2.15bn) short six year issue on Monday was the first euro benchmark covered bond from Poland, with issuance in the market previously limited to smaller, Polish zloty-denominated trades, and Rafał Kozłowski, CEO of PKO Bank Hipoteczny (pictured), described the deal as the culmination of a wait of almost two decades.

“It has been a huge, intensive process,” Kozłowski told The Covered Bond Report. “Poland first completed covered bond legislation some 18 years ago.

“It took us almost 18 years to get here, even though residential mortgages in Poland developed quite well.”

The process was kick-started in 2013, Kozłowski said, when the Polish FSA began urging banks to extend the maturity of their funding profiles and the authorities began revising the Polish covered bond framework to be aligned with established European benchmarks.

In 2013, PKO Bank Polski began the process of establishing a mortgage bank subsidiary for the issuance of covered bonds, which finally started operations in 2015. PKO Bank Hipoteczny then issued a zloty-denominated debut benchmark in April of this year, a PLN500m (Eu116m) five year that was the first benchmark Polish covered bond since the update to the law, before selling a second zloty benchmark in June.

“Since the mortgage bank was established, everything has happened quite quickly for us, and it has been quite intense,” added Kozłowski.

After completing a European roadshow, PKO on Friday announced a mandate for a euro benchmark June 2022 issue. Leads Deutsche, JP Morgan, LBBW, PKO Bank Polski and Société Générale then on Monday morning launched a Eu500m no-grow deal with initial price thoughts of the 25bp-28bp over mid-swaps area.

Guidance was then set at the 20bp-25bp area on the back of books over Eu1.4bn, before the leads revised guidance to the 18bp-20bp area, will price within range, with books around Eu1.5bn. The deal was then re-offered at 18bp.

“This deal has made us quite optimistic,” said Kozłowski. “We treat this result as a testimony to the simplicity of our product, to investor confidence in our product, and to trust in Poland, Polish legislation, and the Polish economy.”

The new issue was seen as offering a 3bp pick-up over the Polish sovereign, with bankers citing Poland October 2021s and January 2022s at 15bp, mid.

Jakub Niesłuchowski, CFO and deputy CEO at PKO Bank Hipoteczny, added that the issuer had paid a “new jurisdiction” premium on top of a new issue premium, and also noted that PKO’s covered bond issuance is rated Aa3 by Moody’s – two notches higher than Poland.

“That’s why, looking forward, we see potential to price inside the sovereign,” he said.

Bankers estimated that the spread of 18bp over mid-swaps was equivalent to a spread of 55bp-60bp over three month Wibor, in line with the spreads of PKO’s two zloty benchmark issues – which were priced at 65bp and 59bp over three month Wibor.

“This is very comparable with the Polish conditions,” said Kozłowski. “But the depth and the size of the euro market is of course much bigger than the market in Poland.

“For us, the euro market is the place to be. But we will always have the alternative of the Polish market, and now we have the tools to watch both markets and be active wherever it pays off to be.”

Having secured fixed rate funding, PKO Bank Hipoteczny will also be able to offer fixed rate residential mortgage loans to its clients for the first time, Kozłowski added.

The final order book stood at around Eu1.5bn, with around 90 investors. Fund managers were allocated 55% of the deal, banks 21%, central banks and official institutions 14%, and insurance companies and pension funds 10%. Accounts from Germany took 46%, the Nordics 19%, Central and Eastern Europe 10%, Austria 8%, the UK 5%, the Benelux 4%, Switzerland 4%, and others 4%.

“Our first impression was that this demand shows there is a place in Europe for our next transactions,” said Kozłowski. “Also, what was very peculiar was that asset managers took some 55% of the allocations, and bank treasuries took only 21%.

“That is pretty different from a standard covered bond that is placed in Europe, and gives a very clear indication that we have attracted real money institutional investors, while we expect bank treasuries to join the party when they have limits on us approved, most probably for our second transaction.”

Kozłowski also highlighted the relatively high participation of CEE accounts.

“This is something special,” he said. “We have not observed this in other transactions in recent years, and I think this is a very clear indication, for us and for the other players, of how this market can develop.”

Kozłowski said that, including Monday’s deal, covered bonds are responsible for just 2% of mortgage funding in Poland. He noted that fellow Polish bank mBank has had a mortgage bank established for 17 years and already has a cover pool in place, and said that two other banks are also contemplating the establishment of their own subsidiaries for the issuance of covered bonds.

“So there is big potential for this market,” he said.

PKO Bank Hipoteczny will aim to return to the euro market with a benchmark covered bond “at least” once per year, Kozłowski added.

The European Bank for Reconstruction and Development (EBRD) announced on Tuesday that it had placed a Eu20m bid for PKO’s new issue. The EBRD was involved in the development of Poland’s updated covered bond law.

“It shows that there is a need for this type of instrument from Poland on the European capital market,” said Lucyna Stańczak-Wuczyńska, director for EU Banks in the Financial Institutions Group at the EBRD. “The EBRD remains ready to support this development with its funds as much as with its expertise and policy dialogue.”

Photo credit: PKO