La Banque Postale showed the “new normal” for Eurozone covered bonds to be more than manageable as it took EUR1bn of orders for a EUR750m 10 year issue today (Wednesday), despite a sustained reduction in ECB orders, but bankers said not all issuers may find it so easy.

The ECB yesterday confirmed it has “further adjusted the standard primary market bid size” under CBPP3 after it placed an order for around 10% of a EUR500m Deutsche Kreditbank issue. This is a substantial reduction from the typical bid the Eurosystem had maintained for eligible primary market deals since April, of 30% of a deal’s expected issuance size.

The adjustment had been anticipated, as the ECB will from 1 October lower its monthly QE target from EUR30bn to EUR15bn, but its timing had been uncertain, and when it arrived the cut was more severe than some market participants had expected, with many expecting the next step to be orders of 20% or 15%.

Before La Banque Postale came to the market some syndicate bankers speculated yesterday afternoon that many issuers would now think twice about entering the euro covered bond market, or at the very least would have to adjust their strategies and expectations.

“There is a big degree of uncertainty now, because if you think prices need to go wider, the question is where do you start and how much is enough?” said a syndicate banker yesterday afternoon. “You do not want to be the second issuer in the market getting a bruise, but then if you start too wide you risk looking too defensive and moving curves wider.”

However, La Banque Postale hit the screens this morning with leads BayernLB, Deutsche, Goldman Sachs, ING, Natixis and Santander opening books for the 10 year obligations de financement a l’habitat with guidance of the mid-swaps plus 5bp area.

After around one hour and 45 minutes, the leads announced that books were above EUR750m, excluding joint lead manager interest. One hour later, the spread was set at 3bp and the size at EUR750m with books at EUR1bn, excluding JLMs. Over 40 accounts were in the final book.

A lead syndicate banker said the ECB had placed an order of around 10% of the EUR750m issue size.

“This is the new normal, Eurozone trades having to reach real and true demand, and it works, even if some investors are much more sensitive than they were after the summer break or do not make orders as big as they used to,” he said.

The lead syndicate banker said La Banque Postale did not change its execution strategy in terms of spread in response to CBPP3 adjustment, stating that the deal would have been launched with the same initial guidance if it had been launched last week.

“But you have to decide things like that on a case by case basis,” he added. “LBP is a special name – it is one of the rarer issuers and quality-wise is one of the best out of France, and it has a long-standing investor base with some accounts in the book that do not usually participate in French paper.

“For another French name at the other end of the issuer universe, for example, we might have decided that we would have to start 1bp or so wider than we would have. And you can only imagine if we were talking about a peripheral name from Italy or Spain.”

Some bankers said La Banque Postale offered a final new issue premium of around 4bp, seeing La Banque Postale February 2028s at around minus 2bp, mid, pre-announcement. Others said the new issue premium was 1bp smaller, citing more recent 10 year French benchmarks, with Crédit Agricole Home Loan SFH August 2028s seen at plus 1bp.

Deutsche Kreditbank’s EUR500m social covered bond yesterday had a final book above EUR630m, including EUR50m joint lead manager interest. Bankers who worked on the deal – while stressing that the order book was high quality and that around a third was allocated to SRI accounts – acknowledged that demand was below expectations, attributing this to the effective EUR100m cut in the ECB’s ticket.

Bankers said many issuers will have to pay up to and appeal to real money accounts in order to avoid disappointment as they cannot rely on the ECB to the same extent as before, and indeed, covered bond spreads are now widely expected to increase in the coming months – albeit not as severely as in corrections earlier this year, as this may be moderated by more limited supply. This could result in some issuers deciding against entering the market in the last quarter of the year, especially those that have completed their funding plans and were mulling pre-funding exercises.

German issuers were said to have been monitoring the market and considering new issues, but bankers highlighted that some EUR500m German trades launched earlier in the year would have been undersubscribed if EUR100m had been taken off the ECB’s order.

“Some issuers may need to rethink what this means for their all-in funding costs, if they have the flexibility,” added a syndicate banker. “Some will have to adapt, the question is how quickly they can change their plans.

However, syndicate bankers stressed that the new normal is not something to be afraid of.

“We expect a short transition here, as execution strategies will have to readjust from the recent modus operandi, leading to higher NIPs and looking to rebalance away from the Eurosystem into real money buyers waiting on the sidelines,” said Armin Peter, global head of debt syndicate at UBS.

Peter added that market participants should not be concerned that the cut in ECB orders might result in a sell-off in covered bonds, noting that market participants agreed at an ECBC conference just two weeks ago that spread widening of 5bp-10bp is likely over the next six to nine months and that investors deem this manageable.

CBPP3 set for September recovery

ECB figures released on Monday show the CBPP3 portfolio increased EUR245m, from EUR258.539bn to EUR258.784bn, in the week to last Friday. Figures released yesterday (Tuesday) afternoon show that around EUR500m of CBPP3 portfolio holdings matured last week, implying gross purchases of around EUR745m.

This is down from EUR1.436bn in the previous week and below the 2018 weekly average of EUR905m.

One CBPP3-eligible benchmark deal settled last week, a EUR500m Raiffeisenlandesbank Vorarlberg issue. Central banks and official institutions were allocated 28% of the deal and analysts estimate the Eurosystem took around EUR100m.

This would imply that secondary market purchases totalled around EUR129m per day last week, up slightly from around EUR95m-EUR115m per day in the previous week.

In the first three weeks of September, the Eurosystem has racked up gross covered bond purchases of around EUR2.885bn, already more than EUR1bn more than was purchased in the whole of August. However, gross purchases are now expected to be lower in the last three months of the year, given the ECB’s primary market adjustment and broader lowering of its monthly QE target.