PKO Bank Hipoteczny found local appetite for fixed rate covered bonds to be shallow when it sold the largest such issue last week, a PLN265m long four year deal, and the issuer’s CEO said future fixed rate trades should be aimed abroad after foreign accounts took 55% of the trade.

On Monday of last week (19 June), PKO Bank Hipoteczny priced the new PLN256m (Eu60.4m) September 2021 issue at 57bp over mid-swapd, with a fixed coupon of 2.69%.

“The rationale for this deal was to check and verify the potential of the Polish zloty-denominated fixed rate market, because we had never tried it and it was high time to check the possibility of raising fixed rate funds for the long term in the Polish zloty space,” Rafał Kozłowski, CEO of PKO Bank Hipoteczny, told The Covered Bond Report. “It is also one of the elements for the preparation of changes in our residential mortgage product.”

Residential mortgages offered by the PKO Group are exclusively floating rate, with an interest rate reset every three months, linked to three month Wibor.

“99.8% of all Polish mortgage origination goes into floating rates,” Kozłowski said. “In our opinion, Polish banks should adjust their offer and start offering the residential mortgage product with a fixed rate.

“To do that, fixed rate funding would be supportive. Therefore, the target was, firstly, to establish what is the size of the fixed rate market in Polish zloty and, secondly, who are the potential investors.”

The final book for the new issue comprised 12 accounts, with foreign investors allocated 55% of the deal.

“The findings are that the market is less accommodating,” said Kozłowski. “Also, it is very visible that a large amount went to foreign investors and that the domestic market for fixed rate bonds is shallow.

“The takeaway for us is that if we want to follow with the next fixed rate transactions, we should do two things. Firstly, we should convince the Polish market about fixed rate bonds, because there is a huge need for that. Secondly, we should target fixed rate zloty-denominated bonds predominantly to foreign investors, because that is where the demand is.”

Kozłowski added that the frequency with which it will return to the Polish zloty market with fixed rate bonds will depend on market conditions in the zloty and euro markets.

“Now we have, let’s say, several pianos,” he said. “The first piano is euro benchmark covered bonds, the second euro private placements, the third Polish zloty floating rate bonds, the fourth Polish zloty fixed rate, and the others, which we have not yet used, are other foreign currencies or euro floaters.

“We will always have to play one of our pianos – as a mortgage bank in Poland we have no other source of funding away from covered bonds – but it is about choosing which to play to get the best sound out of these pianos. Nowadays, there are four pianos that we now know how to play.”

The deal is the PKO Bank Polski subsidiary’s fifth Polish zloty-denominated covered bond within a year, with all its previous deals in the currency being floating rate notes. These bonds are currently paying coupons in the range of 2.42% to 2.48%.

“As expected, the interest rate of a covered bond with fixed rate is at the start a bit higher than its equivalents with floating rate, but it is worth mentioning it will stay unchanged until September 2021,” said Kozłowski.

The European Bank for Reconstruction & Development (EBRD) invested PLN50m in the new issue.

“The development of the local capital market is key for Poland’s further successful growth and the EBRD is committed to support this with our contribution,” said Lucyna Stańczak-Wuczyńska, EBRD director for EU banks in the financial institutions group. “Well-functioning capital markets supply the real economy with the means to grow and prosper.

“The introduction of covered bonds is a good example of an innovative product which serves this goal.”