Andbank is preparing to issue Andorra’s first covered bond – and the principality’s first ever public deal in the wholesale markets – to diversify its funding sources as part of a long-running internationalisation plan, according to an official at the issuer, citing the instrument’s “investor-friendly” nature.

Andbank (Andorra Banc Agricol Reig) announced yesterday (Wednesday) that it has mandated JP Morgan to arrange a European roadshow commencing next Monday to market a potential inaugural euro sub-benchmark mortgage covered bond. The deal will have an intermediate maturity and be issued out of a new Eu500m programme, arranged by JP Morgan.

Paco Collell, director of the financial institutions group at Andbank, said the move into the covered bond market represents part of an internationalisation process on which the private bank embarked in 2008, having traditionally focussed on its domestic market.

“Basically, because most of our liabilities are deposits, we decided that we would like to get access to the institutional investor market,” he said. “This meant we would be the first Andorran issuer targeting the wholesale market, targeting institutional investors in general.

“And so, after talking to our colleagues at JP Morgan, we thought that the covered bond format would be the most investor-friendly format with which to access the market. It provides our best quality assets in a robust covered bond structure.”

While Andbank has privately placed senior unsecured notes and has via an EMTN programme placed deals within its network and client base, the covered bond is set to be the first public deal from the principality.

“Our first issue is a non-benchmark deal and our plan is to access the capital markets on a regular basis, according to our needs and our new mortgage production,” added Collell.

“In order to increase our investor base, when we think about coming back to the market in the future, we will think about all available options in the capital markets, including senior and of course covered bonds.”

The covered bonds will be backed by mortgage loans secured on properties situated in Andorra. As of 30 April, the cover pool comprised Eu177m of mortgages out of a group total mortgage book of Eu750m Andbank is rated BBB (stable) by Fitch and its covered bonds are expected to be rated BBB+ by the rating agency. Andorra is rated BBB (positive).

Andorra does not have covered bond legislation and, as such, Andbank’s deal will be a structured covered bond. It will be issued out of Andbank’s Netherlands branch, Andorra Capital Agricol Reig BV, with a guarantee from the parent in Andorra and with a second recourse from an SPV based in Ireland. The bankruptcy-remote SPV will receive cover assets originated by Andbank in Andorra via a true sale.

“The process was long for us as an issuer, but it was all in order to allow us to build what is in our view the best format to investors,” said Collell. “We focused our work on bringing the best and most robust deal to investors and to make this a successful transaction.”

Collell added that it is unclear when a legislative covered bond framework will be implemented in the principality.

“The Andorran government has been updating the country’s regulation dramatically, and the legislative changes have been tremendous in the last few years,” he said. “But a new specific covered bond legislation is not a priority as of today.”

If other Andorran banks eventually enter the covered bond market, Collell expects them to adopt a similar structure to the one pioneered by Andbank.

“There are only two other banks of sufficient size in Andorra that could follow us,” he added, “but, on our part, we expect this to be a nice deal for Andbank, so I think they will at least look at what we are doing right now.

“The main thing is that this is the first public issue from Andbank and the first issue from any Andorran bank, so we will try our best to make this transaction a success.”