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Westpac $2bn fives open dollars, focus on senior saving

Westpac opened the US dollar covered bond market for 2019 with a $2bn five year benchmark on Monday, happy to raise a large amount at an attractive level versus senior unsecured, even if the funding cost was a little higher than in euros, according to a lead syndicate banker.

Westpac imageLeads HSBC, RBC, TD and Westpac opened books for the five year 144A/Reg S benchmark with initial price thoughts of the 60bp over mid-swaps area on Monday during Asian business hours. After moving to guidance of the 58bp area during the US morning, the deal was priced at 58bp over late Monday European time and sized at $2bn (A$2.8bn, EUR1.75bn), based on a slightly larger book.

“The book was really impressive,” said a syndicate banker at one of the leads. “That is in part a function of the fact that they haven’t been in the dollar market for a couple of years, which has also been a little undersupplied in terms of covered issuance, meaning people have plenty of line availability.”

He added that Westpac had been happy to take a large amount out of the market in one go, given the documentation work necessary to tap the market and to avoid tapping the market too often.

Although Westpac had not issued a dollar covered bond since February 2016 – when it sold a $1.35bn five year deal – it issued in euros as recently as late November, when it issued a EUR1bn five year. The lead banker said that this partly explained why the issuer opted for dollars despite the funding cost being a “handful” of basis points higher than euros.

“Westpac took a very grown-up approach to this,” he said. “They didn’t look at covered bonds as an asset class in isolation and worry that they might be accused of paying up. Instead, they looked at the saving relative to a dollar senior unsecured transaction, where they could issue at around 50% of their senior unsecured spread, which historically is an extremely low percentage – you’ve tended to see the spread for covered bonds relative to senior unsecured fluctuate around 70%-75%.

“That is indicative of the fact that covered bonds are just a very useful asset class in the toolbox issuers can have when times are a little more challenging.”

He said the spread paid by Westpac was equivalent to around 8bp wide of where its secondaries were trading in euros, noting that a new euro benchmark would also have to pay a new issue premium.

The dollar benchmark attracted sponsorship from the three time-zones it had been open to, said the lead banker, including from accounts active across currencies who were attracted by the relative value on offer.

Westpac’s pricing compares with 45bp paid by compatriot National Australia Bank for a $1.15bn five year issue on 27 November that was the last US dollar covered bond benchmark.

“The drift that you’ve seen from that in late November to today is pretty much reflected in other currency covered bonds as well,” noted the lead banker.