A Crédit Agricole Home Loan SFH €1bn short 12 year benchmark today (Thursday) was overshadowed by the largest covered bond of the year – a €2.5bn dual-tranche Santander cédulas that attracted €5.6bn of demand – and undercut by a Eurosystem order of less than 40% of its ultimate size.

After the announcement of Crédit Agricole Home Loan SFH’s mandate yesterday (Wednesday), leads ABN Amro, BBVA, Crédit Agricole, Danske, LBBW and SG this morning went out with guidance of the mid-swaps plus 10bp area for the November 2031 euro benchmark-sized obligations de financement de l’habitat. After around an hour and 25 minutes, books were reported as being over €1bn. After a little over two and a half hours, the pricing was set at 7bp and the size at €1bn on the back of orders above €1.2bn, and the final book was well above €1.25bn.

A syndicate banker at one of the leads said that after announcing the mandate yesterday and a good number of investors signalling their interest, they were confident the trade would work. However, competing supply this morning from Santander with its dual-tranche, five and 12 year deal, caught them off guard.

“This was unexpected,” he said, “and clearly not helpful. While from a different jurisdiction, it’s a strong Eurozone issuer and the 12 year was offering a pick-up of 2bp from where we were starting.

“Clearly this drew the attention of some investors,” he added.

The level of demand for the French deal was also restricted by a CBPP3 order from the Banque de France (BdF) that did not ultimately reach 40% of the final issue size, unlike the Eurosystem’s standard since it rebooted APP in November.

A syndicate banker said that this was not the first time that the French central bank had acted thus, while others have cited a lack of consistency in the way the national central banks approach bookbuilding, particularly when the final issue size is not announced from the start.

“It is hard to read in advance what they will do,” he said. “Don’t take the 40% of an envisaged size for granted – the Banque de France, at least, has the flexibility to do otherwise.”

Nevertheless, the lead banker said that by and large, the other aspects of the transaction had gone according to expectations, with a good quality order book featuring strong German and Nordic sponsorship.

“We had the right types of accounts,” he said, “with asset managers, pension funds and the like leading the order book. But to be clear, on another day this would have got a higher order book.”

Like other issuers, Crédit Agricole sought to offer investors a positive yield – ultimately 0.054% – through its choice of maturity.

“A print further down the curve would have led to a negative re-offer yield,” he said, “and the issuer and us believed this was something best avoided.”

Another lead banker said investors are generally more cautious on what they deem interesting from a pricing perspective, but that the 10bp area was the appropriate starting point for the trade.

“Santander were also on screens with a 12 year,” he said, “which was very close, but we had a book of some €1.3bn at the end, which was good.”

He saw fair value for the deal at plus 3bp-3.5bp, based on Crédit Agricole’s curve but also La Banque Postale 2035 paper at plus 6bp, noting that fair value based on only the issuer’s paper could be considered 2bp.

“7bp was the right landing for a €1bn-size transaction,” he said, “which is what this issuer generally does in covereds.

“I cannot realistically say fair value is plus 2bp when the latest was at plus 6bp,” he added, “so it was in the context of 3bp-3.5bp, meaning 3.5bp-4bp of new issue premium.”

And he said that given the last French issue, the €750m 15 year from La Banque Postale, struggled to generate strong demand, it made sense to price Crédit Agricole’s larger deal wide of it.

“It represents a slightly higher new issue premium,” he said, “based on the fact you have secondaries that are even more squeezed and not reacting to the rates environment, and when investors are starting to be cautious, especially at the long end.”

He agreed that some investors said they preferred the pick-up offered by Santander, while the cédulas market was also structurally undersupplied.

“Technically, it’s now or never to get exposure to Spain,” he said, “so in the realm of the possible you cannot miss out on their trade, whereas realistically you probably can miss a Crédit Agricole, as other opportunities will arise given it has quite a well established curve.”

After announcing the mandate for a five and 12 year dual-tranche transaction this morning, Santander leads Commerzbank, Credit Suisse, ING, Mediobanca, Santander and UniCredit went out with guidance of the mid-swaps plus 10bp area for the five year and 18bp area for the 12 year. After revising guidance for the five year to 6bp+/-1bp, WPIR, and to 13bp+/-1bp for the 12 year, both tranches were ultimately sized at €1.25bn and priced at 5bp and 12bp, respectively, on the back of books above €2.9bn and €2.7bn.

“It was a very, very nice result,” said a syndicate banker at one of the leads.

She said the issuer did not feel the need to pre-announce the transaction, but went out as early as possible this morning to give accounts sufficient time to prepare.

“We knew we could go head-to-head with Crédit Agricole on the same day,” she said, “and there was no reason to worry for either of the issuers.”

She said that prior to launching the deal, they were confident both tranches would work and certain the combination of tenors would attract a diverse mix of investors.

“We knew that many any of the guys who were looking at the five year would not look at the 12 year,” she said, “and indeed, if you look at the final result, the books were well balanced and we did not find there was really a skew, so this is why we ended up doing one and a quarter for both.

“Santander’s curve is quite funny,” she added, “but in the end they paid about 2bp of new issue premium for each tranche.”

She added that given the low yield environment, Santander, like other issuers, was targeting longer-dated tenors, and that the 12 year tranche fitted well within its maturity profile and yielded 0.115%.

“Last year they did a 10 year and a 12 year,” she said, “and this fits nicely in between it 2031s and 2034s.”

Luminor Bank today announced its plans for what is set to be the first covered bond from the Baltics, a €500m euro benchmark via leads Citi, LBBW, Luminor, Nordea and UniCredit. Its roadshow will start tomorrow (Friday).