Bank of Nova Scotia highlighted the dislocated nature of the covered bond market today (Wednesday) with the first euro benchmark since Monday’s dramatic moves in oil, equity and bond prices, as the spread on its €1.25bn five year deal proved an eye-opener for some market participants.

The Canadian issue is the first euro benchmark since a €500m seven year Eika Boligkreditt trade on Thursday, which in turn came two days after a Commerzbank €1.25bn 10 year that was the first to be launched into financial markets that have been roiled by volatility since the start of last week.

On Monday, historic falls in equity markets accompanied by a plunge in government bond yields led some covered bond bankers to forecast that issuers would need to be even more careful in the wake of the renewed volatility, but also suggest that pragmatic issuers could take advantage of short market windows.

Bank of Nova Scotia (BNS) sought to do just that this morning when leads Barclays, HSBC, ING, Natixis, RBC and Scotiabank opened books at 9 o’clock London time for a five year euro benchmark with guidance of the 22bp over mid-swaps area. After a little over an hour and a half, the leads reported books above €1bn, excluding joint lead manager interest, and after two and a half hours the spread was set at 20bp over on the back of books above €1.2bn, excluding JLM interest. The deal was sized at €1.25bn (C$1.94bn) on the back of a final book above €1.4bn.

Some syndicate bankers away from the leads said they were surprised at the starting guidance and eventual pricing, saying the 20bp spread implied a new issue premium of some 10bp, and further that such “generous pricing”, in the words of one, had not resulted in greater demand.

“It was a bit of an underwhelming response for a concession of that magnitude,” said the syndicate banker, suggesting the €1.25bn size was ambitious relative to the €1.4bn-plus book.

However, syndicate bankers at the leads said that screen prices for comparables used to calculate fair value did not reflect where trades could be executed in size.

“You can’t just say that their January 2025s are trading at 10bp, mid,” said one. “The bid is 2bp or 3bp wider, so you probably end up with a new issue premium of around 7bp, which is in line with what Commerzbank paid.”

He added that the European Financial Stability Facility (EFSF) yesterday paid a new issue premium of some 6bp on €2bn of January 2026 paper, “three times their standard NIP”.

Another lead banker said the “dislocated market” is reminiscent of volatile periods in 2008 and 2001.

“Basically investors are aware that the runs they are getting from traders are not reflecting reality,” he said. “They are indicative levels and the price they get will be very, very different.

“So on the one side you have the comps, and on the other you have the true and genuine value, and there is a minimum 2bp difference, if not 4bp or 5bp. And you have to do it on a case by case basis, every day – risk on, or risk off.”

Bankers away from the leads acknowledged this, with one saying the covered bond market is going through a period of readjustment.

“What it tells you is that screen prices are not worth the paper they are written on,” he added. “But traders don’t want to reprice since they will have to reprice their inventory.

“So either you are operating with fake prices or massive new issue premiums.”

One of the lead bankers said that from the outset the issuer was made aware that although the leads were confident the guidance was appropriate, they could not be sure of the final pricing outcome.

“We need to take any opportunity and be extremely pragmatic,” he added. “Issuers need to understand they are price-takers, not price-makers.”

The leads also went out relatively late in the morning for a euro benchmark, with the lead banker saying they wanted to be clear that the market was clearly “green” and would not turn “reddish” within an hour of launch – even if conditions went on to deteriorate later in the day.

With the Canadian issue being ineligible for CBPP3, the transaction relied more on real money covered bond buyers, the lead banker noted, and he said that although bookbuilding started relatively slowly, they received some large orders and after putting out the first €1bn-plus update gained further support, allowing them to move 2bp to the 20bp spread – also acknowledging some spread sensitivity in the book – and a €1.25bn size above the €1bn minimum being sought.

The other lead banker said that the result was a “decent” outcome.

“Any trade is a good trade,” he added. “If you try to be clever with pricing, you can come unstuck very quickly, which would be bad for you and bad for the covered bond market.”

One of the bankers away from the deal agreed that the pricing was not to be scoffed at, noting that it was inside where, for example, a CBPP3-eligible five year benchmark for Crédit Agricole was priced in January 2019. He said issuers would need to be “humble” in the face of continued difficult market conditions.

The European Central Bank is expected to announce measures to counter the economic impact of the coronavirus pandemic on the real economy tomorrow (Thursday), and the lead banker said BNS was keen to launch its deal beforehand to avoid any deterioration in conditions should the ECB disappoint, and any rush of issuance should its actions be well received. The other lead banker said three or four CBPP-eligible issuers are “knocking on the door” should the latter scenario materialise.

He also noted said that the cross-currency basis had over the past week improved in favour of Canadian issuers accessing the euro market, and that the Canadian dollar market had widened.

The five year maturity was chosen to attract the broadest range of investors, according to the first lead banker, and also resulted in a yield low for a non-CBBP3-eligible euro benchmark of minus 0.228%.

Oma Savings Bank could issue a euro sub-benchmark covered bond this week, subject to market conditions, according to a post-roadshow update from the leads. After the completion of an electronic roadshow yesterday (Tuesday), the Finnish issuer could launch a five to seven year transaction.