A Eu500m 10 year covered bond for Bawag PSK today (Wednesday) came in the middle of guidance and its book size was not disclosed, and bankers expressed surprise given the success of an Erste 10 year yesterday, with some attributing the contrasting fates to Bawag’s public sector collateral.

Bawag PSK and leads Commerzbank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS announced a mandate for the Eu500m no-grow 10 year public sector covered bond yesterday (Tuesday), shortly after Erste priced a Eu750m 10 year mortgage-backed issue at 3bp over mid-swaps in the first Austrian benchmark of the year.

Bawag’s deal was launched this morning with guidance of the 9bp over mid-swaps area. The spread was eventually fixed at 9bp, with the size of the order book not disclosed.

“To fix the spread in the middle of guidance and not disclose the book development is as sure a sign as you can get that a deal has struggled, and maybe hasn’t gotten over the line in terms of demand,” said a banker.

Bankers away from the deal disagreed whether Bawag’s deal offered a sufficient premium versus Erste’s new 10 year issue, which was trading around its 3bp re-offer level this morning. Some said that fair value for a new Bawag 10 year was around 6bp, stating that Bawag should trade around 3bp back of Erste.

“To me the 9bp starting point, with an eye on pricing a few basis points tighter, seemed fair,” said a syndicate banker away from the leads. “I would have thought Bawag, even for a public sector deal, should be able to achieve this.

“This result goes totally against our expectations.”

Other bankers said the pricing differential between Erste and Bawag should be greater.

“I think 9bp was a bit too aggressive to leave room for a tightening of the spread, and I would imagine that some accounts felt the same,” said one. “We have seen a strong performance in Austrian spreads that has caused spread differentiation between the issuers to be less pronounced than early last year, but I still think a public sector deal from Bawag should come 5bp-7bp back of Erste.

“Now that they have failed to move, this deal leaves a 6bp differential between the two. The market has sort of restored the relative value to where it should be.”

Bankers also cited as comparables Bawag’s February 2022s – the issuer’s longest dated outstanding – at minus 2bp, and 2025-2026 paper from other Austrian issuers at 3bp.

Erste’s new issue yesterday attracted around Eu1.25bn of orders from around 70 accounts, and bankers said the deal, and similarly comfortable results for Austrian issuers in the latter half of 2016, had shown that sentiment towards Austrian issuers had improved following the conclusion of a long-running saga between Heta and its creditors. However, each of the deals in question were backed by mortgages, rather than public sector collateral.

“Much of investors’ worries regarding Austria centred around the public sector, so it is possible that they still have concerns about this segment of the Austrian covered bond market,” said a banker.

Bankers agreed, however, that the lack of demand for Bawag’s deal should not be interpreted as a sign of any market weakness.

“Looking at the demand for SG’s trade today, it’s fairly clear that whatever went wrong here is specific to Bawag,” said one.