Sumitomo Mitsui Banking Corporation (SMBC) successfully issued the first Japanese covered bond today (Tuesday), a EUR1bn five year benchmark that attracted more than EUR1.4bn of demand to position the new jurisdiction well in spite of the inaugural deal’s idiosyncrasies.

Plans for SMBC’s debut were announced on 11 October and the issuer embarked on an extensive roadshow running from 17 to 26 October (Friday). On Friday the leads announced that the five year euro benchmark could be expected early this week.

Leads Goldman Sachs, SMBC Nikko, Barclays, BNP Paribas, Crédit Agricole and UBS went out with guidance of the low to mid-20s over mid-swaps for a benchmark-sized issue this morning, and after little more than half an hour gave an update saying books were above EUR1bn. An hour later the spread was set at 20bp over and the size at EUR1bn (¥128bn) on the back of more than EUR1.4bn of demand.

According to a banker at one of the leads, the final book was just shy of EUR1.5bn, comprising 67 accounts, with no investors dropping out at the re-offer level of 20bp over.

By way of comparison, five year euro paper from Singapore was quoted at around 9bp over, according to figures circulated by the leads, Canadian paper at 4bp-7bp over, and Australian paper at 7bp over. New issue premiums recently have typically been around 5bp-6bp.

The lead syndicate banker said SMBC’s debut had gone even better than expected, noting that the issuer had the top end of the anticipated size range of EUR500m-EUR1bn, and suggesting that even at the larger size the deal could have been priced 1bp-2bp tighter, such was the strength of demand – in spite of prevailing market conditions being less than ideal.

“The investor community ultimately deemed it a job well done and has awarded SMBC appropriately with a really good sized book, good granularity, and ultimately a good price.” he said. “It’s a win-win for everybody, including the issuer – which optically has priced 60% inside their new issuing OpCo level – and from the investor point of view – they picked up a nice premium over the other comparables.

“And the issuer did not squeeze every basis point out of it, but has left a really good taste for the investors, and I would be surprised if we didn’t see this bond perform on the secondary market.”

He said a new five year euro senior OpCo SMBC issue would probably be priced at around 50bp over mid-swaps. The issuer previously told The CBR that a key aim of issuing covered bonds in euros is to help expand its foreign currency funding.

SMBC also cited the stability of the Japanese mortgage market as a key message it would be conveying to investors on its roadshow, and the lead banker said that this was indeed a key factor in the triple-A rated deal’s success.

The contractual nature of the issuance – with the jurisdiction lacking covered bond legislation – had been highlighted as a potentially limiting factor, alongside the use of RMBS as collateral, with the covered bonds not enjoying key regulatory benefits of legislative issuance.

“There was obviously pushback from some quarters to it being a non-legislative covered bond,” said another lead syndicate banker, “but it was by no means an obstacle we could not overcome. After the pan-European roadshow the story was well understood.

“We had a really good book, with participation from central banks and sovereign wealth funds, which it’s always good to see, asset managers, insurance companies and even bank treasuries. And they are all rates investors.”

Bankers away from the leads said the transaction offered a nice diversification opportunity for investors able to invest in the issue, and appeared to offer a successful start for the jurisdiction.

“It is really good to see that after a lot of work it all came together,” said one of the lead bankers. “Ultimately SMBC has done not only a great job for themselves but a great service for what we anticipate to be other issuers from Japan so that we have a strong Japanese covered bond market on our hands.”