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TD ‘parked’, Oberbank sub succeeds amid Italy ‘mayhem’

Toronto-Dominion took the correct decision in postponing an expected covered bond today (Tuesday), said bankers, amid a morning of “mayhem”, although TD’s deal could still emerge tomorrow. Oberbank was able to successfully print a EUR300m debut upon over EUR400m of demand.

Political upheaval in Italy and concern over the country’s membership of the euro sparked a dramatic sell-off in Italian government bonds that prompted the biggest one-day move in two year Italian yields since 1992, of more than 150bp, and triggered major volatility in European markets across asset classes, with one syndicate banker saying he hadn’t seen such a morning since the wake of Lehman’s collapse. Spanish yields were also hit after it emerged that prime minister Mariano Rajoy will face a no confidence vote on Friday.

Yesterday (Monday) morning – on a public holiday in the UK and US – Toronto-Dominion and leads BNP Paribas, ING, TD, UBS and UniCredit had announced a mandate for a seven year euro benchmark covered bond. However, the deal did not emerge this morning.

“Obviously looking across screens this morning it was a dreary outlook, so we decided not to proceed,” said a syndicate banker at one of the leads. “Given the frequency of this issuer, we felt it was prudent to park it and assess and go on a stronger open.”

The lead syndicate banker said the deal could still be launched tomorrow (Wednesday).

“It’s still on the cards,” he said, “it’s just subject to the market and if we see a good opportunity or not.”

Syndicate bankers away from the leads said the decision was the right one.

“Given how the markets opened this morning, no one will blame them for not going ahead – it was total mayhem,” said one. “It was a fair decision.”

Austria’s Oberbank, however, went ahead with its EUR300m no-grow 15 year inaugural transaction following a mandate announcement yesterday.

Leads DZ Bank, Erste Group and UniCredit launched the deal this morning with guidance of the mid-swaps plus 15bp area. After around one and a half hours, the leads announced that books were above EUR300m, including EUR55m joint lead manager interest. The spread was subsequently set at 14bp with books over EUR400m, including EUR55m JLM interest.

“It’s a good result in the circumstances,” said a syndicate banker away from the leads.

Bankerss said the debut issuer had the advantage of having extensively marketed the debut last week, and suggested the deal was likely well supported by the German investor base, allowing it to go ahead in spite of the adverse conditions.

The Austrian bank held a European roadshow introducing its covered bond programme, running from Tuesday to Friday of last week, saying an inaugural EUR300m issue was expected to follow. After completion of the roadshow, the Austrian bank and its leads announced a mandate for a EUR300m 15 year issue yesterday afternoon, with the balance of feedback from the 30-plus investors that participated pointing towards the long maturity.

Bankers noted that deals in the RMBS and SSA markets were also successfully completed today, but expect that covered bond issuance will now be limited and strictly opportunistic in the coming days, due to the volatility but also bank holidays in some parts of Germany on Thursday.

“Aside from TD, I’d be surprised if anyone comes to the market now,” said one. “I think we need to see a sustained period of lower volatility before others will want to join.”

Covered bond spreads, while more resilient than other asset classes, have also been affected by the volatility. Italian covered bond spreads – which had already been subject to a sustained rise last week – have risen by around 10bp-15bp since Friday’s close, with most of that increase taking place after today’s rise in BTP yields. Core covered bond spreads were seen slightly wider today.

Syndicate bankers said, however, that the gap between bid and offer levels was telling, and said there were no real flows at current levels.

“My trader says the levels on show right now are, in a word, ridiculous,” said a syndicate banker. “There are only sellers and definitely no investors actively buying at these levels, so it is difficult to have a sophisticated view on how much widening there is, you can only say for sure that everything is wider.”