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BPCE bags ‘historic’ book to reopen 10s as ‘stars align’

BPCE SFH attracted some €6.4bn of orders to its debut green covered bond today (Tuesday), a €1.25bn 10 year that achieved the biggest book for a euro benchmark since 2013 and the tightest pricing and longest maturity since 6 March, with a lack of supply seen as foremost among supportive factors.

After holding investor calls for its first green euro covered bond yesterday (Monday) and announcing the mandate this morning, BPCE SFH leads Barclays, CaixaBank, Credit Suisse, Goldman Sachs, ING, Natixis and UniCredit went out with guidance of the mid-swaps plus 23bp area. A first update reported books over €2.5bn, a second put books over €4.8bn with guidance revised to 18bp+/-1bp, WPIR, and the deal size set at €1.25bn. The new issue was ultimately priced at 17bp over on the back of €6.4bn of demand, good at re-offer.

Syndicate bankers at and away from the leads acclaimed the depth of demand for the transaction – the book peaked at €6.5bn, on a par with a €1bn no-grow seven year deal from UniCredit in January 2013 – and said this showed the primary market to have been undersupplied.

“Nobody expected the books to go this high,” said a banker away from the leads. “It’s crazy times, and it’s all about the structural imbalance between demand and supply, which means it’s absolutely impossible not to succeed with a covered bond at the moment.”

A lead banker said the “historic trade” also demonstrated the extent to which the market has tightened since market volatility peaked in March, with BPCE itself having printed a €1bn five year deal at 40bp on 24 March.

“Things have really changed,” he said. “It’s the largest covered bond book for a very long time, and even with the size we did, it’s the second highest oversubscribed transaction this year behind a Belfius deal in January, which was much smaller at €500m.”

Today’s trade is the longest dated-dated euro benchmark in 11 weeks, and the lead banker said the maturity was a natural progression for the market given that two of the last three euro benchmarks, from CRH and Hypo Noe, were in the seven year bracket, while 10 years also constituted a natural choice for the French name.

“I expect more will consider it after this,” he added.

The covered bond is the first issued by BPCE with proceeds earmarked for the refinancing of residential mortgage loans on energy efficient properties, and the lead banker said the green moniker offered a pricing benefit to the issuer of around 1bp.

“This is down to the fact that the book probably wouldn’t have been so large if it weren’t green,” he said, “or some investors wouldn’t have stayed till the end with the big move we did from start to finish – there’s not many green covered bonds out there.

“So the green element helped, the maturity helped, as well as the positive yield, the name and spread levels – all the stars aligned to allow us to do a very highly successful deal for the issuer.”

Another lead banker said the green aspect boosted the order book by some 30%, with 180 accounts ultimately involved, and that the speed at which it grew was almost unrivalled.

“In around 15 minutes, we had over €2.5bn in the book,” he said, “and in terms of size, I saw orders from some guys which I haven’t seen in quite some time.

“What was also unusual was the number of investors – you usually get around 60-100 in the book – we had 180 – so each and every investor who can buy covered in Europe put an order in – it was insane.”

He said the issuer was also fortunate with the 10 year swap rate, which backed up some 5bp after the issuer announced its plans yesterday (Monday) afternoon, meaning that the deal yielded a marginally positive 0.053%.

“This is a rates product more than a credit product,” he said, “so people look at underlying yield, and this definitely helped.

“Everyone knows that there’s simply no covered bond supply on the horizon,” he added. “So this deal might be a function of investors realising this is the one they have to buy.”

Fair value for the deal was around 12bp, according to another syndicate banker away from the leads, who argued that the guidance at 23bp was overly generous based on where its outstanding secondary was trading, although he conceded that there was some rationale behind its strategy.

“It’s obviously a blow-out,” he said, “but they were on the defensive side in terms of the starting point. You could argue its curve was completely flat and you needed to build some curve in there – which they probably were doing – but what this really indicates is a market where investors are desperate for bonds.”

BPCE five and eight year paper were trading at 14bp and 12bp-13bp, respectively, according to another syndicate banker away from the leads, who said that although the guidance may have been slightly on the wide side, the 6bp move to pricing more than compensated for this.

“The move is more than 25% of the original spread they put on screens,” he noted. “At the moment, however, it’s somewhat difficult to define the correct starting level, assuming that bonds are almost clearing at any price because investors have previously had no choice. I tend to believe there is no truly correct starting level – scarcity makes every transaction a virtual no-brainer.”

The first lead banker echoed this sentiment, highlighting that fair value could be in the range of anything from 12bp-18bp.

“It was a little unclear,” he said. “Given the comparables were all over the place, you could take your pick.”

Photo copyright: Thomas Gogny/BPCE