Sumitomo Mitsui Trust Bank became the second Japanese covered bond issuer yesterday (Wednesday), with its €850m seven year deal deemed a success and step forward for the jurisdiction, even if orders peaking at €1.1bn made it one of the less subscribed autumn deals and contributed to its “odd” size.

Sumitomo Mitsui Trust Bank (SMTB) leads Goldman Sachs, BNP Paribas, Crédit Agricole, Barclays, UBS and Daiwa went out with guidance of the mid-swaps plus 33bp area for a euro benchmark-sized seven year transaction. After an initial update reported books over €800m, the spread was set at 30bp on the back of orders above €1.1bn, and the deal was ultimately sized at €850m (¥106bn) with a final book of around €950m.

SMTB follows Sumitomo Mitsui Banking Corporation (SMBC) as the second issuer from Japan to enter the covered bond market, with similarly structured contractual issuance, in the absence of a legislative framework in the country. SMBC opened Japanese covered bond issuance in October 2018, and has since several benchmarks, the latest being a €1bn five year transaction on 3 September priced at 24bp.

A banker away from the leads said the relatively modest demand for SMTB’s debut was not entirely unexpected.

“Because it’s a non-legislative region, obviously the buyer base is a little bit smaller,” he said, “and the first trade is often the most difficult, as people have got to put lines in place. But when you look at book size, they still got over €1bn, which is a decent result on the back of their work – and its juicy spread.

“It’s pleasing to see another name from Japan accessing the market.”

A lead banker said “hugely overblown” books were indeed not anticipated, given the contractual and inaugural nature of the trade, as well as the immaturity of the Japanese sector. He also noted that SMTB has a lower profile and less of a track record internationally than megabank SMBC.

“But from where I’m standing, it ultimately proves that even the Japanese issuers who may not be as well-known on international markets can effectively bring a very substantive and fairly priced transaction to the market,” he said.

A lead syndicate banker said the issuer had been well received in both its non-deal and then deal-related investor work in the past fortnight, interacting with accounts that had played an anchor role in SMBC’s issuance as well as other investors. However, he noted that some investors preferred to sit out the inaugural issue and also wait and see if it would become as regular an issuer as its compatriot.

The consensus among investors was that the two issuers’ covered bonds were on a par, according to the lead banker.

“For example, if you look at the SMTB framework, they index LTVs, whereas SMBC doesn’t, but they don’t mark to market the RMBS, so it’s hard to say which is the better out of the two,” he said. “And while their liquid assets are more restrictive – they don’t allow for Japanese government bonds, but only cash – they allow for lower rated RMBS. Both have pros and cons in certain respects, so all in all it’s hard to pick a winner.

“But investors felt there should be some premium attached to it as an inaugural trade and people having to open up lines,” he added.

The leads put fair value for a new SMBC seven year at 26bp-27bp, with a pick-up for it being a debut putting fair value for SMTB in the high 20s, which the lead banker said led to the IPTs of the 33bp area.

“Overall the feedback was encouraging,” he said. “We had an idea that the inflection point would be around 30bp for some of the key investors, but felt we would perhaps have less of an aggressive move from start to finish than some recent trades.

“Obviously the covered bond market has been on fire and we felt we could take advantage of that, as well as the tailwinds we had from SMBC’s trade, so we decided to proceed.”

SMBC’s €1bn five year on 3 September was its most subscribed euro benchmark yet, attracting some €1.8bn of demand.

The lead banker said SMTB’s book built gradually, but ultimately was “very solid”.

“We can’t hide the fact that naturally there were investors not looking to participate or with decreased volume just due to the inaugural nature of this trade,” he said. “But all in all the book was top quality – roughly 70% went to asset managers, with the majority buy and hold investors.

“A lot of people like the absolute spread of these kinds of products, and it certainly shows that more investors are getting comfortable with Japanese covereds, and how far that market has come.”

The €850m final size, rather than a typical €750m or €1bn size, caused eyebrows to be raised in the market, with some considering it “odd”.

“I wish they hadn’t done that,” said one banker. “With it being an inaugural trade, it would have been better if they had gone down the traditional route for a benchmark size.”

Lead bankers said a few factors played into the €850m size, one being that SMTB is more used to US dollar and other markets where benchmark sizes are more fluid, and another being that the €850m size put it closer to the magnitude of SMBC’s €1bn debut. They said a €750m size would meanwhile have opened up discussions around a tighter price, which could have then excluded some key accounts the issuer wanted involved, while a bigger size could have hit the deal’s performance.

The issue was this (Thursday) morning quoted at 28.5bp bid, 28bp offered, he noted.