Arkéa built a EUR1.3bn book for a long five year issue today (Tuesday) to print its largest covered bond in years, but demand was lower for SCBC sevens, which were sized at an unusual EUR650m, albeit with a EUR175m 2033 tap added. A KHFC euro social covered bond debut could emerge tomorrow.

The two European issuers chose to enter the market this morning despite European equities following Asian markets lower, although with Italian government bonds still stable. Syndicate bankers involved in both trades said that market conditions in general remained tough, but that credit markets have been relatively stable and that triple-A covered bonds should be able to cope.

The new benchmark for Arkéa Home Loans SFH was first out the blocks, with leads Crédit Agricole, Crédit Mutuel Arkéa, LBBW, Nykredit and Santander going out with initial guidance of the mid-swaps plus 7bp area for a benchmark-sized March 2024 deal. After three-quarters of an hour they gave a book update of around EUR600m, and after around one and a half hours revised guidance on the back of a EUR1bn book to plus 5bp, +/-1bp will price in range. The spread was set at plus 4bp and the size at EUR750m on the back of EUR1.1bn of demand after two hours of bookbuilding, and the final book totalled EUR1.3bn at re-offer.

The EUR750m deal is at the top end of the EUR500m-EUR750m range envisaged by Arkéa and its leads, with the French issuer not having sold a deal above EUR500m since 2011, when it last issued EUR750m.

Syndicate bankers at the leads said that a new issue premium at initial guidance of around 9bp, given fair value of around minus 2bp, was relatively high versus some recent starting points and helped generate momentum, which was given a renewed push when they were able to provide the early book update of around EUR600m.

One said that the combination of the long five year maturity – at the shorter end of recent supply – and a spread that would be in the context of the 5bp area over mid-swaps was key to the deal’s success.

He compared the spread’s reception to a Bank of Nova Scotia EUR1.75bn five year at 6bp over mid-swaps a week ago that attracted some EUR2.2bn of demand, having started at 9bp over, and noted that a Belfius EUR750m five year on Tuesday of last week launched at guidance of 2bp over attracted a peak of more than EUR1bn of orders which fell slightly to some EUR900m when the deal was ultimately priced at 1bp through mid-swaps.

“Here we had strong demand, including from investors we have not seen in covered bonds for some time,” he added, “especially core Eurozone names that have been affected by CBPP3.”

He suggested that the long five year maturity had also contributed to the stronger demand for the trade than that achieved by the SCBC today, although a syndicate banker on the latter said that seven years had been felt to be the sweet spot, and noted that Arkéa continued to have the benefit of CBPP3 support.

Swedish Covered Bond Corporation (SCBC) entered the market shortly after Arkéa, with leads BAML, Deutsche, Goldman Sachs, HSBC and NordLB going out with an initial level of 8bp over mid-swaps for its benchmark seven year issue. The issuer was also offering to increase a EUR500m 15 year deal it priced in April.

Syndicate bankers at the leads said that although SCBC’s secondaries implied fair value for the seven year in the context of 2bp through mid-swaps, more liquid and more recent Swedish comparables implied fair value of as wide as 3bp over mid-swaps, and that both lead manager and investor views on this diverged.

After an hour the leads provided a book update of around EUR600m and, after pricing was revised to 6bp over, the seven year deal was ultimately sized at EUR650m, and a EUR175m 2033 tap was priced at 12bp over, with demand reported at an aggregate of around EUR900m.

The re-offer on the seven year implied a new issue premium of anything from 3bp to 8bp, depending on the comparables being taken.

“I thought it was attractive versus secondaries at first, and expected it to go well based on there having been little Swedish supply,” said a banker away from the leads, “but given how things turned out, I think they may have had an issue with this being the fourth time SCBC has issued this year. Seven years may not be the sweet spot, too, and they came out after Arkéa, and the pricing may not have looked so relatively attractive in comparison.”

New covered bond issues not sized at EUR500m, EUR750m, EUR1bn or larger multiples of EUR250m are very rare, but a syndicate banker at one of the leads said other sizes are more common in the sovereign, supranational and agency market, and that they may become increasingly common in other asset classes. A banker away from the leads agreed – despite describing the size as “very odd” – noting that more flexibility was already being shown in the number and size of pricing steps taking during execution, and that this could be extended to sizes.

Korea Housing Finance Corporation (KHFC) could launch its first social covered bond and the first euro benchmark from a Korean issuer as soon as tomorrow (Wednesday), after having announced that, having considered euro and US dollar options, it is now focusing on the European market, with a view to launching a EUR500m no-grow five year. Pricing in the context of the 50bp over mid-swaps area has been discussed on the basis of investor feedback.