Investors may have the upper hand in a National Bank of Greece comeback covered bond next week, with relative value versus the sovereign seen as key to the deal’s fate, but – offering rare performance potential – the deal could prove hard to resist, according to market participants.

The new issue, which could emerge as early as Tuesday, is set to be the widest-priced and lowest-rated euro benchmark covered bond outstanding and would be only the second public benchmark covered bond issued out of Greece.

Having confirmed its interest in returning to the covered bond market shortly after the Greek government issued a landmark Eu3bn bond in July, NBG announced a mandate on Tuesday for a European roadshow ahead of a potential euro benchmark issue with an expected three year maturity. Arranged by Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, HSBC, NatWest Markets and UBS, the roadshow will conclude on Monday.

NBG is rated Caa3/RD/CCC+ (Moody’s/Fitch/S&P) and its covered bonds B3/B (Moody’s/Fitch).

As the new issue will not be investment grade, it will not be included in the iBoxx Euro Covered benchmark index, and certain investors will be unable to participate in the deal. However, it is eligible for the ECB’s covered bond purchase programme (CBPP3) – the Eurosystem applies a 30% share limit per ISIN for Greek covered bonds – and bankers expect good interest from investors such as fund managers and development banks.

“I would expect this to go well on the basis that, as this is a very important re-entry, they can’t afford for it to not go well,” said a syndicate banker away from the leads. “They will have to be relatively generous with the pricing, and that should mean it is attractive and performs accordingly thereafter.”

Bankers said, however, that finding an appropriate price for the landmark deal will not be straightforward.

“Investors will firstly have a binary decision – can I buy Greece, or can I not?” said a syndicate banker away from the leads. “If you can, and you take the view that Greek govvies are pretty volatile and the covered bonds will be more stable, you then probably would buy it as long as it comes a modest amount inside govvies.

“You can’t simply look at it and think the spread looks nice – you’re buying a Greek bond, of course it should be attractive. You’ve got to look at it as a relative value product versus govvies, and they need to get that right.”

The deal is widely expected to be priced inside the Greek sovereign, reflecting its higher rating and that holders of Greek covered bonds got their money back amid the crisis while investors in the sovereign suffered losses.

Based on trading patterns between covered bonds and sovereign bonds, Michael Spies, covered bond and SSA strategist at Citi, expects NBG’s deal to offer a pick-up of more than 100bp over Turkish VakıfBank May 2021s, which are the widest covered bonds in the iBoxx index and were seen bid at 2.2% today. He noted this would imply a yield of more than 3.2% for the new NBG issue, which would be well inside the interpolated Greek sovereign curve. Greece 2019 bonds were seen trading at a yield of around 3.15% and the recent August 2022s around 4.5%-4.6% today.

“The base case is definitely through govvies, but the big question is if it’s 50bp, 70bp or 100bp through,” said a syndicate banker. “It depends where you look, but that’s the range we see in comparable jurisdictions.

“Personally, I think it should come in the middle of that, but only time will tell.”

Bankers said investors would not have all the power, however, given that the new issue offers a rare opportunity.

“For investors, there aren’t a lot of opportunities to actually get performance in any covered bond instrument,” said one. “People won’t exactly be forced to buy the deal given that it won’t be on the index, but if you’re a covered bond investor and you don’t, and it then performs extremely well, it’s going to be quite difficult to go back to buying German Pfandbriefe at minus 13bp and generate the same alpha performance.

“Some people may feel they can’t afford to miss out.”

In an investor presentation, NBG said that the planned covered bond issuance would signal its mid-term commitment to capital markets, expand its investor base and establish a pricing benchmark for future issuance, while also helping it with its aim of disengaging from Emergency Liquidity Assistance (ELA) in early 2018.

Only one benchmark Greek covered bond has been issued to date, a Eu1.5bn issue for NBG in September 2009. That seven year deal, issued out of a Eu10bn soft bullet programme, was partially bought back by the issuer in 2012 and matured in October 2016. The new issue will be sold out of a Eu15bn CPT programme.

Last Friday, it was announced that Greece’s Piraeus Bank is issuing a Eu500m five year covered bond to be primarily placed with the European Investment Bank and other European institutions. The covered bond, the bank’s first to be externally-placed, will be issued later this month.

“Assuming all goes well, it’s a good endorsement of the covered bond to see the Greek banks using this product for their rehabilitation in the markets,” said a syndicate banker. “It shows the value of having secured funding programmes available.”

Alongside NBG, ASB Finance Limited and Montepio have been on the road this week marketing euro benchmark covered bond issues. Bankers at the issuers’ respective leads say the deals are likely to be launched early next week, but potentially later than Monday.