The Covered Bond Report

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Caffil, VUB head expected pick-up amid ‘new normal’

Covered bond issuance is seen picking up this week, with mandated deals from Caffil and VUB expected tomorrow (Tuesday), as the asset class remained resilient in spite of wavering market sentiment this morning and following a large equity sell-off last week, according to syndicate bankers.

Equity markets opened weaker today (Monday), following fears of a second wave of coronavirus in Beijing and across the world, but overall sentiment is sanguine, said one syndicate banker.

“It felt pretty soft first thing today, but it actually firmed up a bit over the course of the session,” he added.

However, given stock markets tanked on Thursday, he exercised caution, warning that more volatility could easily follow.

“That equity sell-off last week wasn’t really driven by all that much,” he added, “so we have to take things bit by bit.”

Other syndicate bankers noted that covered bonds had remained resilient to such volatility, and that spreads are around 0.5bp-1bp tighter than a week ago.

“A bit of corona news from China is not going to derail this market,” said one, “so I’m pretty relaxed as far as this news is concerned.”

In spite of public holidays in parts of Europe on Thursday, issuance picked up slightly last week, with LBBW and Achmea issuing €500m no-grow transactions on Monday and Tuesday, respectively. The syndicate banker said he expects a further pick-up in issuance this week given levels have almost returned to pre-Covid levels.

“We’re heading for a rather active week,” he added, “for starters, there’s full five days, so there’s likely more to come than the two announcements we’ve had already – a bit of ‘new normal’, if you will.”

Another syndicate banker said covered bonds are proving increasingly attractive versus other assets.

“It’s clearly a strong safe haven on the back of this increased volatility,” he said.

Caisse Française de Financement Local (Caffil) this afternoon announced plans for a 10 year euro benchmark-sized transaction, which is expected to be launched tomorrow via leads Citi, Commerzbank, Natixis, SG and UniCredit.

The French issuer’s last benchmark, a €1bn five year on 28 April, was priced at 22bp over mid-swaps, and was the first covered bond with proceeds earmarked specifically for the Covid-19 crisis through the financing and refinancing of loans to French public hospitals.

“Markets have moved a lot since its last deal,” said a syndicate banker at one of the leads.

According to pre-announcement comparables circulated by the leads, Caffil November 2029s and January 2031s were trading at 6bp and 7bp, respectively, while Crédit Agricole December 2029s and November 2031s were at 6bp and 7bp, and CRH October 2029s and BPCE green May 2030s – issued on 19 May – were both at 7bp.

Všeobecná úverová banka (VUB) is expected to launch its third euro benchmark tomorrow (Tuesday), a €500m no-grow five year transaction via leads Banca IMI, Commerzbank, Danske, Erste and LBBW, after announcing the mandate this (Monday) morning.

In March 2019, VUB launched the first benchmark covered bond from the Slovak Republic, a €500m no-grow five year, and less than three months later issued a €500m no-grow 10 year.

According to pre-announcement comparables circulated by the leads, VUB March 2024s and June 2029s were at 29bp and 38bp, respectively, while Slovenská sporiteľňa June 2026s and Prima banka Slovensko October 2026s were at 18bp and 20bp.

A syndicate banker away from the leads put fair value for the new issue in the low 30s, suggesting it will prove attractive versus other compressed spreads.

“We’re still talking a fairly hefty spread versus anything else that is out there in Europe,” he said. “Considering we’re running quite a bit behind last year’s volumes, people are becoming more and more comfortable with buying such names.

“If we’re seeing a trend towards tighter spreads, this is a great opportunity to buy into that compression.”

A syndicate banker at one of the leads said the comparables are not necessarily an accurate indication of where the deal will be priced.

“This is the kind of trade the market wants to see right now,” he added. “It’s a relatively established Eurozone issuer, in a short to mid-term maturity, and it will offer a decent pick-up versus other European names.”