Montepio sold the first Portuguese CPT covered bond today (Monday), a Eu750m five year issue that was priced 10bp inside IPTs on the back of a “remarkable” Eu2.7bn of orders, despite unfamiliar features in the structure, while offering a substantial pick-up from recent Portuguese supply.

Article ammended to clarify comparables.

The new issue is Caixa Económica Montepio Geral’s first euro benchmark covered bond since 2009. The issuer converted an existing programme from soft bullet to conditional pass-through (CPT) format in mid-2016 and has no publicly issued benchmarks outstanding.

Following a European roadshow that concluded last week, leads JP Morgan, NatWest Markets and UniCredit launched the five year obrigações hipotecárias with initial price thoughts of the mid-swaps plus 75bp area this morning. Guidance was later revised to the 70bp area on the back of Eu1.4bn of orders.

The spread was ultimately fixed at 65bp and the size at Eu750m with books at Eu2.7bn, pre-reconciliation.

“Eu2.7bn demand is quite remarkable, and it shows that peripheral trades can go really, really well, with a pick-up,” said a syndicate banker.

Some peripheral markets widened over the last week on the back of concerns over developments in Catalonia, particularly the Spanish AT1 and Tier 2 markets. However, within covered bonds only Spanish cédulas have widened, and bankers said demand for new covered bonds from other peripheral countries had held up well after limited issuance – with Montepio’s deal only the fourth Portuguese benchmark of 2017.

Bankers said it was difficult to calculate fair value for the new issue given a lack of outstanding paper from Montepio and Portuguese comparables. However, they noted it offered an attractive pick-up versus two issues sold by Banco Santander Totta this year. A Eu1bn April 2024 issue for Totta was priced at 62bp in April and seen trading in the mid to low 20s, mid, today, while a Eu1bn September 2027 issue was priced at 48bp on 19 September was trading at around 35bp.

Montepio’s CPT covered bonds are rated A3/A/A (Moody’s/Fitch/DBRS) while Totta’s are rated A1/A/A by the same rating agencies. Totta’s covered bonds tend to trade well inside those of other Portuguese issuers.

The last euro benchmark five year from Portugal, a Eu1bn May 2022 issue for Banco Commercial Português, was priced at 65bp and seen trading at around 38bp, mid. BCP’s covered bonds are rated BBB+/A (Fitch, DBRS).

“You’d expect any other Portuguese issuer to price well back of Santander, so it is difficult to tell how much of the premium relates to this being Montepio’s first trade in a long time and how much relates to the CPT features,” said a syndicate banker.

Montepio’s CPT programme includes a number of features that are not found in those of established Dutch and Italian CPT issuers. These differences include that the maturity of individual bonds issued by Montepio can be automatically extended in the event of non-payment of any principal or interest due, and that the maturity extension can be for 50 years, whereas in the Netherlands this is limited to 32 years.

Montepio also offers a repurchase agreement allowing investors to sell bonds back to the issuer in the event of a maturity extension, within 10 to 60 days of the original redemption date. If Montepio does not fulfill this commitment, this will not constitute a covered bond default but will constitute a default in respect of the issuer’s senior unsecured obligations.

In the event of issuer insolvency, the maturity of all Montepio’s bonds will be automatically extended, as is conventional in other CPT programmes.

Analysts noted that the discretionary nature of the condition allowing the maturity extension of individual series means the programme may need to be adjusted should the European Commission’s eventual harmonised covered bond framework follow recommendations from the EBA.

Bankers said the strong demand for the new issue showed that these unfamiliar features did not dissuade many investors from participating in the deal.

“Investors who have significant issues with extendible structures to begin with are probably also less likely to get involved in deals from higher beta issuers like this one,” said one. “It’s a single-A rated note, so it’s not like we’re looking at a sub-investment grade NBG transaction, but the people already looking at this are probably less likely to be put off by the structural features.”

National Bank of Greece will conclude a European roadshow today ahead of an expected three year euro benchmark covered bond, which could be launched as soon as tomorrow (Tuesday), according to bankers at the leads. Like Montepio, its covered bonds are also conditional pass-through with the programme allowing for the extension of individual bonds and offering a put option.