Aegon is considering establishing a soft bullet covered bond programme in addition to its conditional pass-through programme, in a similar move to NN Bank, although its latest CPT issue, a €500m five year on Monday, still had a “great outcome”, according to the issuer.

Aegon Bank entered the covered bond market in November 2015, opting for a conditional pass-through (CPT) programme alongside Dutch peers after NIBC pioneered the structure in 2013. At the time, the issuer cited factors such as the collateral efficiency of the structure.

However, CPTs have not in every respect been afforded the same favourable treatment enjoyed by hard and soft bullet covered bonds, with the ECB, for example, discriminating against them, contributing to a more limited investor base for the instrument. Such limitations, as well as the potential for longer maturities and the improved efficiency of soft bullets, contributed to NN Bank in June moving from issuing CPTs to soft bullets.

Aegon is now considering the set-up of a soft bullet covered bond programme for the future, and Lein-Pieter Cevaal, vice president, head of capital market solutions, Aegon NV, and Pieter Nooitgedagt, head of capital management, Aegon Bank NV, explained their thinking to The CBR.

“We are very pleased with the investor base for CPT covered bonds, but we also note that the investor base for soft bullet issues seems to be bigger, especially for the longer end of the curve, i.e. beyond tenors of 10 years,” they said. “Such tenors would have a good fit from an ALM perspective with the (relatively) long interest reset periods of Dutch mortgage loans. Last, but not least, the collateral efficiency of soft bullets vis-à-vis CPT covered bonds has improved in recent years – in other words, the overcollateralisation requirements for soft bullet covered bonds have come down significantly.

“We have therefore come to the conclusion that the economics of a soft bullet programme have improved in recent years and it surely is a viable funding option. Also, in terms of pricing, slightly lower spreads for soft bullets relative to CPT covered bonds can be perceived in the current market environment.”

Aegon’s new issue on Monday was its first benchmark covered bond since November 2017, and Cevaal and Nooitgedagt noted that issuance twice in 2017 (in June as well as November) had obviated the need for a 2018 covered bond benchmark, while a €500m five senior non-preferred transaction in June 2019 did likewise last year. They said Aegon expects to continue to be a regular issuer going forward.

The new covered bond issue was timed to refinance Aegon’s debut covered bond, which matures on 1 December. Cevaal and Nooitgedagt said that the Covid-19 crisis did not impact Aegon’s funding plan for the year, but noted that the issuer strengthen its contingency funding by setting up a retained RMBS, SAECURE 19, in May.

Leads ABN Amro, BNP Paribas, HSBC, Rabobank and SG built a €2.25bn-plus book for the new €500m five year CPT issue on Monday, pricing it at 10bp over mid-swaps following initial guidance of the 15bp area. The book is the largest achieved by Aegon on a covered bond.

Cevaal and Nooitgedagt said the pricing was “a great outcome for the issuer and for the investors”, and said Aegon’s profile and the quality of its paper enabled it to complete the intra-day execution with such strong demand.

More than 70 accounts participated, with the Benelux taking 37%, Germany and Austria 35%, Nordics 11%, France 7%, the UK 3%, southern Europe 3%, Switzerland 2%, and others 2%. Fund managers were allocated 28%, banks and private banks 30%, central banks and official institutions 31%, and insurance companies and pension funds 11%.

As of end-June, around 73% of Aegon Bank’s mortgage portfolio is made up of Nationale Hypotheek Garantie (NHG) mortgages, and such government-sponsored housing loans have been identified by rating agencies as one of the only ESG aspects of covered bonds to make a significant positive contribution to credit quality.

Aegon is meanwhile working to improve the energy efficiency of its mortgage portfolio in conjunction with its borrowers by developing products and propositions that enable them to make sustainable choices, according to the issuer, which contacted over 13,000 clients last year in this respect.

“We are happy with the recognition from rating agencies related to the social component of our portfolio,” said Cevaal and Nooitgedagt.

“We are following the ESG markets closely, but we do not have concrete plans for explicit green, social or sustainable issuances at the moment.”