A Eu500m five year debut for Bank of Queensland offered relief to the covered bond market today (Thursday), the CPT attracting “convincing” orders above Eu900m thanks partly to a sizeable pick-up over soft bullets, after a two-day wait that prompted some to fear an early end to pre-summer supply.

The Australian regional bank’s inaugural covered bond had at first been expected on Tuesday after a mandate was announced for the Eu500m no-grow issue on Monday, following a European roadshow introducing the new conditional pass-through (CPT) programme last week. However, the deal did not emerge, and bankers at the leads said some accounts required more time to carry out credit work.

This morning, leads BNP Paribas, Commerzbank, ING, NAB and UBS launched the deal with guidance of the 30bp over mid-swaps area. Guidance was later revised to 27bp plus or minus 2bp, will price within range, before the spread was fixed at 25bp with books above Eu900m.

“To get the deal almost twice subscribed and tighten the spread 5bp is more than decent for a debut, on all counts,” said a banker away from the leads.

Bankers said the strong demand for the deal was a good sign for the market, heading into the end of the first half of 2017.

“Had this gone badly, or not gone out at all, I would have worried about the prospects of any more supply before the summer break,” he said. “The market will be relieved to see this deal went well.”

Bankers estimated that fair value for a new Eu500m five year soft bullet covered bond from an established Australian issuer would have been around flat to mid-swaps today, citing Westpac January 2022s trading at around flat, mid, National Australia Bank March 2022s at 1bp, and Commonwealth Bank of Australia May 2022s at around minus 1bp.

They noted that in the Dutch covered bond market – the only established market offering bonds with both maturity structures – CPT covered bonds trade around 15bp wider than soft bullets, and said Bank of Queensland’s debut therefore offered a new issue premium of around 10bp.

The price discovery process for the inaugural CPT issue was expected to be particularly challenging, with bankers reporting that covered bond investors had become increasingly price sensitive towards the quarter-end, and the primary market outlook was further clouded by a sell-off in rates that began on Tuesday.

“The market had looked a little tricky, but rates were more stable this morning and somewhat fortuitously it looks like this would have been the best day for them to come to the market this week,” said a banker away from the leads.

On Monday of last week (19 June), Moody’s downgraded the big four Australian banks (ANZ, CBA, NAB and Westpac) from Aa2 to Aa3, while also cutting the ratings of some smaller banks, citing elevated risks in the country’s housing market. Bank of Queensland’s A3 rating was not downgraded, but bankers said some investors had become more cautious towards Australian paper following the cuts, with Australian covered bonds among the poorest performers in recent weeks.

“While the issuer and leads were collecting feedback, we were hearing concerns that they wouldn’t make it to the finish line –as some investors still have reservations about CPTs,” said a banker away from the leads. “The headache news about Australia on top of this meant that it then became a protracted process.

“But in the end, they finished convincingly. Nobody knows of course what they would have ended up with if they had decided to play the game on Tuesday, but they are definitely in a good position as they can now justifiably say that waiting paid off.”