Luminor Bank launched the first Baltic covered bond today (Wednesday), a €500m no-grow five year issue under Estonian legislation that attracted over €1.6bn of orders, following Commerzbank yesterday in offering an attractive pick-up amid still-challenging markets.

After completing a roadshow on Monday and yesterday (Tuesday) announcing that a €500m no-grow five to seven year issue could come this week, leads Citi, LBBW, Luminor, Nordea and UniCredit this morning went out with guidance of the mid-swaps plus 30bp area for a €500m no-grow five year transaction, which has an expected rating of Aa1. After around 50 minutes, books were reported as being over €750m, excluding joint lead manager interest, and the spread was ultimately set at 25bp on the back of over €1.6bn of demand. The new issue yielded minus 0.179%.

Luminor’s deal is only the second euro benchmark covered bond in almost two weeks, after Commerzbank yesterday launched the first since 20 February, a €1.25bn 10 year Pfandbrief, with Covid-19 concerns having interrupted supply in the interim. The German trade was launched on the back of a less negative market tone and followed by a 50bp Federal Reserve rate cut.

“The market doesn’t really know what direction to take after this,” said a covered bond banker, “but if anything, Commerzbank yesterday proved there is a price in this market.

“The fact you have such a new name working at 25bp with a €1.5bn book is a really good thing,” he added.

A syndicate banker at one of the leads said the issuer decided to proceed after receiving supportive investor feedback in an otherwise “not so straightforward” market.

“There was a bit of comfort yesterday,” he said, “and this morning looked OK, but this is not to say the market was hot. The feedback we got from over 50 names was quite good, which led us to believe we could move ahead with this transaction for a solid print.”

More than 70 investors were in the final order book and the lead banker said the fairly granular distribution was not dissimilar from the level of participation in a senior unsecured Luminor trade last year. He noted that the 5bp tightening was in line with moves witnessed on the strongest order books for benchmarks this year.

“It clearly did not rest on the shoulders of the Eurosystem,” he added, “and would have worked equally well without its participation.

“For a newcomer, this is a good trade that sets the reference for future issuance which will be a part of its funding strategy going forward.”

A banker away from the leads said Luminor’s new five year paper offered a decent pick-up versus Slovak covered bonds and, being the first issue from the Baltic region, had further scope for performance.

According to pre-announcement comparables circulated by the leads, VÚB March 2024s and Slovenská sporiteľňa June 2026s were at 16.5bp and 10.5bp, respectively, and Prima banka October 2026s and VÚB June 2029s both at 17bp.

The lead banker acknowledged the pick-up versus the secondary levels of the Slovak covered bonds, but said that Luminor paid perhaps 3bp-5bp more than where a new Slovak benchmark would be priced, taking into account the higher new issue premiums now required.

“Commerzbank paid something to the tune of 7bp-8bp yesterday,” he said, “so it’s not that far away. But at least compared to outstanding secondary comps, in the current circumstances, it is an attractive pick-up, and the five year tenor is relatively short given there has not been a lot of supply there, which obviously helped.

“What is fair to conclude is that the issuer definitely achieved its targets with the pricing it was looking for.”

Luminor’s choice of the five year maturity reflected investor preferences, he said, even if a seven year print would also have been feasible.

“This was an opportunity to gain some exposure for the very first time into the albeit small, but fundamentally strong and robust Baltic market,” he added, “of which Luminor is one of the top three names, next to SEB and Swedbank.”

The spread paid by Luminor is the second highest paid on a euro benchmark covered bond this year, with only a €750m 25 year Cariparma trade paying more.

Another syndicate banker away from the leads said the strength of the transaction was a very positive signal for the market.

“It reflects the recovery we’ve been seeing, because last week you wouldn’t have considered doing it,” he said. “It feels a bit firmer generally.

“There’s a window to get things done –the corporate space was also fairly active today – so, on the back of both this deal and Commerzbank, I would not be surprised if we saw other names looking at the covered bond market quite closely.”

OMA Savings Bank is planning a roadshow commencing next Monday for a euro sub-benchmark transaction, it announced this afternoon. LBBW, Nordea and SEB have the mandate. The Finnish issuer’s last deal was a €300m five year in March 2019.