Sabadell benefitted from pent-up demand for peripheral paper to attract over Eu2.4bn of orders to a Eu1bn 10 year cédulas today (Wednesday), allowing it to tighten pricing 7bp and end up at a “fair” premium. Santander Totta is set to follow tomorrow with the first Portuguese benchmark since 2015.

After announcing a mandate yesterday (Tuesday) afternoon, Banco de Sabadell leads Banco Sabadell, Barclays, Commerzbank, Crédit Agricole, Lloyds and Natixis launched the 10 year cédulas hipotecarias this morning with guidance of the 40bp over mid-swaps area.

Guidance was later revised to the 36bp area and the size set at Eu1bn on the back of over Eu2bn of orders. The spread was then fixed at 33bp, with the book closing at over Eu2.4bn, pre-reconciliation.

“Overall, this is an extremely good result, especially given that we have had a slightly softer market backdrop today, with the open a bit on the red side,” said a syndicate banker at one of the leads. “The very strong demand shows that there is a lot of cash to put to work and strong appetite for peripheral covered bonds, which is not surprising given that this is only the third deal from the periphery in almost four months.”

The new issue is the second benchmark covered bond from Spain this year, following a Eu1.5bn 10 year for CaixaBank on 3 January. There has been only one other peripheral benchmark in 2017, a Eu1.5bn dual-tranche, eight and 12 year offering from Italy’s Cariparma on 14 March.

Before the mandate was announced, Sabadell November 2021s were seen at 5bp, mid, October 2023s at 10bp, and June 2024s at 12bp. Bankers at and away from the leads said the deal therefore offered a new issue premium of 6bp-8bp.

“It was not super-easy to find fair value for this trade, but extending the curve from those comparables and working on a mid basis I’d personally put fair value at around 25bp,” said a syndicate banker at one of the leads.

The premium is the largest offered by a euro benchmark covered bond in recent weeks. The last benchmarks to be issued before the Easter break, a Eu750m seven year for Commonwealth Bank of Australia and a Eu500m six year for Yorkshire Building Society, both sold on 3 April, were priced with premiums of 1bp and 3bp, respectively. Many earlier deals were deemed to have been priced flat to fair value, albeit for core names, as spreads ground tighter on the back of limited issuance.

“This is a fair approach, I think,” said a syndicate banker away from the leads. “Given that this is the first trade from the periphery for some time, I thought the premium could have been higher.”

Some bankers noted that the new 10 year issue offered a substantial pick-up versus CaixaBank January 2027s, the last Spanish benchmark, which were priced at 60bp in January and seen at 18bp, mid, pre-announcement.

This pick-up was justified, they said, because of the need for price discovery for a new Spanish issue and because of the credit differential between the two issuers. Sabadell trades slightly wider than CaixaBank across the curve, with CaixaBank March 2024s quoted at 6bp and February 2025s at 14bp.

The lead syndicate banker said CaixaBank’s deal was trading unusually tight.

“I think that deal is clearly very squeezed, largely by the backstop bid from CBPP3,” he said. “I don’t think it is the most helpful comparable.”

At the final spread of 33bp, the deal deemed to have come around 65bp inside the Spanish sovereign.

Bankers noted that while bonos have underperformed since the turn of the year, cédulas have been among the strongest performing covered bond segments in 2017, with spreads supported by the lack of supply and heavy redemptions. Some Eu17bn of Spanish euro benchmarks matured in the first quarter and another Eu7bn falls due this quarter.

Shortly after books closed for Sabadell’s deal, Banco Santander Totta announced that it has mandated Deutsche Bank, Santander, Société Générale and UniCredit for a potential seven to 10 year benchmark obrigações hipotecárias (OH). A syndicate banker at one of the leads said the deal could be launched tomorrow, subject to market conditions.

The deal would be the first benchmark Portuguese covered bond since October 2015, when Totta sold a Eu750m five year OH.

“It looks as though Sabadell’s deal has opened the door for the peripherals and that Totta are aiming to follow on from this very encouraging result,” said a syndicate banker.

Despite Totta’s mandate and the strong demand for Sabadell’s new issue, bankers expect that peripheral supply will remain relatively scarce, as the funding needs of peripheral banks are low after the last round of the ECB’s TLTROs.