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CFF EUR1.5bn fives offer succour, ABN lines up 20s

CFF showed covered bonds can succeed even amid the prevailing adverse conditions with a EUR1.5bn five year that attracted EUR2bn of orders today (Tuesday), having read the market well, bankers said. ABN Amro is set to issue a 20 year tomorrow, and others could soon pull the trigger.

Credit Foncier imageThe new issue for Compagnie de Financement Foncier (CFF) is the first euro benchmark in almost two weeks, and comes after market conditions turned last month, as investors became increasingly selective, apparently less willing to accept the tight valuations that had been the norm in 2017 and the start of this year, while the ECB also placed lower than expected orders for the last three CBPP3-eligible deals, causing some to struggle.

“The risk of failure has increased, and if investors – including the one big investor – continue to act as they have, it will stay that way,” said a syndicate banker.

CFF leads CaixaBank, Commerzbank, ING, Natixis, Nordea and SG launched the five year issue with guidance of the mid-swaps minus 5bp area this morning. The leads later announced that books had exceeded EUR1bn, and subsequently revised guidance to the minus 7bp area, plus or minus 1bp will price within range, before fixing the spread at minus 8bp and the size at EUR1.5bn with the final book over EUR2bn.

“It’s a very nice trade, especially considering the backdrop wasn’t the best after a weak overnight session in the US and Asia,” said a syndicate banker away from the leads. “It’s a good name, and having the limelight to themselves proved beneficial.

“I think investors and issuers will look at this and think covered bonds, at least, are working, and will potentially try to push on if we see risk assets bounce back this afternoon.”

The deal is the largest single-tranche covered bond from France since May 2017, when CFF printed a EUR1.5bn long five year, and the largest single-tranche covered bond from any jurisdiction since 16 January, when DNB Boligkreditt printed a EUR1.5bn five year.

Syndicate bankers away from the deal said the issuer and its leads had read the market well in terms of pricing.

“They acknowledged that markets are less firm and chose the maturity that’s in demand, offering very nice relative value versus anything that’s out there in the five year space and making sure that the print and the demand was good,” said one.

The new issue is CFF’s second euro benchmark covered bond of the year, following a EUR1bn 10 year that was priced at minus 7bp on 3 January and which was seen trading at around re-offer today. Bankers noted that the new issue was launched with guidance wider than the final spread of the CFF’s last trade, and was ultimately priced just 1bp tighter, despite being five years shorter.

“The difficulty a lot of covered bond issuers are facing right now is that we see the primary market repricing secondary market curves, and spreads move as soon as new issues hit the screen,” said a syndicate banker away from the leads. “Secondary levels do not necessarily represent clearing levels.”

Bankers noted that CFF’s approach was similar to that adopted by Bank of Nova Scotia when it issued the last euro benchmark covered bond, on 21 March. The Canadian bank launched its EUR1.25bn five-and-a-half year deal with guidance of flat to mid-swaps, the same guidance level it used for a EUR1bn seven year issue at minus 4bp in January. The five-and-a-half year issue was ultimately priced 2bp wider than the earlier seven year – at minus 2bp – and attracted EUR1.7bn of orders, substantially more than preceding trades, and syndicate bankers said issuers would likely have to follow BNS’s example in offering more generous new issue premiums than had been the norm earlier in the year.

“However, the BNS story was slightly different,” added a syndicate banker. “They squeezed in a deal in a deteriorating market, so it wasn’t the best timing.”

CFF’s final spread of minus 8bp was seen as incorporating a substantial pick-up versus CFF’s curve, with its 2023 paper seen at around minus 15bp, but syndicate bankers said a more useful comparable is the last euro benchmark covered bond from France, a EUR1bn seven-and-a-half year issue for BPCE on 21 February. BPCE’s deal was priced at minus 8bp and seen trading at around re-offer today. Syndicate bankers suggested fair value for a new five year issue from France was therefore around minus 12bp-11bp, implying CFF’s deal offered a new issue premium of around 3bp-4bp.

“They played it safe with the guidance level, but in the end I think it’s a decent price, especially given the size,” said a syndicate banker away from the leads.

ABN Amro announced a mandate this afternoon for a 20 year euro benchmark covered bond that is expected to be launched tomorrow, subject to market conditions. ABN Amro, HSBC, Natixis, UBS and UniCredit have the mandate.

A syndicate banker at one of the leads said the choice of maturity was partly influenced by evidence of strong demand for long-dated paper in the private placement market.

“We have been saying for some time that in this market, you have to go really short or really long,” he said. “We are seeing investors looking for long-dated stuff just to pick up the yield available in those maturities, with accounts expecting rates to rise at some point, and that is what we are targeting.”

Based on ABN Amro’s secondary levels, syndicate bankers expect the deal to be priced with a positive spread and said it could therefore offer a coupon of around 1.5%.

Bankers said other issuers are monitoring the market and could launch deals at short notice.

“A lot of issuers are waiting for some stability in the market,” said a syndicate banker, “and there is a fairly hefty backlog of deals looking to materialise as soon as we see some signs of that stability.”

The Mortgage Society of Finland meanwhile announced this afternoon that has mandated DZ, Nordea and OP to arrange a European roadshow commencing on Monday ahead of a EUR250m covered bond issue. The roadshow will conclude on Friday of next week.