The Covered Bond Report

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Weak books trigger failure warnings as yields near lows

Bankers warned of the risk of a deal not working in the coming weeks as benchmarks for Bank Austria and notably SCBC today (Tuesday) bore out a decline in investor interest in new issues at progressively lower yields and spreads, the Swede attracting only above EUR600m of demand to its 10s.

Oversubscription levels have fallen over the past weeks from the previously multiple times covered order books, with new issue premiums edging up as deals have been priced with positive premiums rather than flat to or through fair value. The narrowing of covered bond spreads towards and through mid-swaps as well as the decline in yields has been blamed for the fall in demand.

But while investors have so far continued to support new issues, syndicate bankers today warned that the market has reached a turning point, with yields increasingly unpalatable to investors – at minus 0.15%, the 10 year Bund neared record lows today.

“It is probably no big surprise,” said a syndicate banker on SCBC’s trade, “but we are starting to see investors get the feeling that rates are extremely low, to the extent that they may go up again, and that is starting to affect order books. Last week was weaker than two weeks previously, and now we are getting even stronger signals.”

The Swedish Covered Bond Corporation (SCBC) attracted only above EUR600m of orders good at re-offer to its EUR500m 10 year issue today, despite paying a new issue premium that the leads put at 2bp. Leads Citi, Goldman Sachs, LBBW, Swedbank and UBS had gone out with initial guidance of the 10bp over mid-swaps area for a euro benchmark-sized deal, then went out with a first update of books above EUR600m after an hour and a half. The book came down from a peak of over EUR850m, including EUR35m joint lead manager interest, to above EUR600m after the pricing was set at 7bp.

The lead banker said that the new demand conditions meant that issuers will have to choose between size and price, and potentially have to pay new issue premiums of more than 2bp if seeking EUR1bn or more.

A banker away from the leads agreed that yields were to blame for the “surprising” lack of demand and revised new issue premium expectations.

“The order books are definitely smaller and the granularity lower,” he said. “We have definitely reached a turning point given where rates are – secondaries have already been under pressure, with spreads widening a bit, while primary has taken a little longer to react.

“You don’t want to be on the trade that doesn’t work,” he added, “but it’s probably coming soon.”

Another echoed this, saying he could envisage a deal being launched soon only for no book updates to follow – “although we will all know what has happened.”

The SCBC lead banker agreed.

“If you sleepwalk into a new issue, I can see someone making a mistake in the coming weeks,” he said.

Another syndicate banker away from the leads suggested SCBC’s cause was not helped by the issuer having encountered modest demand on its two previous visits to the euro market. He added that while fair value was 5bp based on SCBC’s curve, the guidance may have appeared tight to LF Hypotek, for whom he said fair value for a 10 year would be 9bp-10bp over, and that some accounts may consider that SCBC should – as it did previously – trade closer to LF.

The lead banker acknowledged a further suggestion that SCBC’s transaction might not have been optimally timed, coming not just in a softening market, but also in between UK and continental public holidays on Monday and Thursday, respectively. However, he noted that SCBC had still secured a reasonable outcome, adding: “Maybe in a week the market will be closed.”

UniCredit Bank Austria attracted a peak of EUR900m of demand, including EUR35m JLM interest, to its EUR500m no-grow eight year mortgage Pfandbrief today, EUR835m of which was good at re-offer. Leads BayernLB, Erste, HSBC, Santander and UniCredit gave an update that books were above EUR500m, excluding JLM interest, around 50 minutes after opening books with initial guidance of the 10bp area, then gave an above EUR800m update after an hour and 40 minutes, with guidance revised to 8bp+/-1bp, WPIR, and then the EUR900m update after two and a half hours.

The re-offer spread was ultimately set at 7bp over and a lead syndicate banker put the new issue premium at 2bp. Pre-announcement comparables circulated by the leads put Bank Austria January 2026s at 6bp, mid, and March 2029s at 5bp, with other Austrian paper in the eight year part of the curve quoted at 5bp or tighter.

Bankers away from the leads said the outcome for UniCredit Bank Austria was decent, given that UniCredit issuers have been quite active in the market and the Italian associations of the name, while the book was compared favourably to SCBC’s.

A lead banker nevertheless acknowledged the weaker reception deals are encountering.

“If you look at the spread compression between jurisdictions, you can see we are reaching a bottom,” he said. “And investors are really fed up with the moves we have seen recently from guidance to re-offer.”

Photo: SCBC parent SBAB