Komerční banka (KB) sold the first Czech euro benchmark covered bond last week, a €500m five year that attracted some €1.25bn of orders flat to Slovak paper, and CFO Jiri Sperl told The CBR that its new international programme now provides it with a cost-efficient funding source in euros.

After establishing the €5bn international programme at the turn of the year and holding investor calls, the Société Générale group member launched its inaugural issue via Barclays, JP Morgan and SG on Wednesday morning. Following initial guidance of the 18bp over mid-swaps area, guidance was revised to 14bp+/-2bp, and the €500m (CZK13bn) deal was ultimately priced at 12bp over on the back of a final book of around €1.25bn, excluding joint lead manager interest, with orders having peaked at around €2bn.

The Covered Bond Report: Why have you established an international covered bond programme alongside your domestic programme?

Jiri Sperl, CFO, KB: Our domestic programme was designed historically under the previous legislative framework and mainly it was not intended to be rated. For the purpose of our euro-denominated funding needs we have decided to establish a new programme that would meet the requirements necessary to achieve a high ratings level and thus to design a funding instrument providing a very cost-efficient and price-stable funding source.

The CBR: Did the revision to the Czech covered bond legislation in January 2019 influence your plans?

Sperl, KB: It certainly did, we needed the change of legislation in order to achieve our target of highly rated covered bonds. To be clearer about that, KB was one of the initiators of the actions taken by the Czech Banking Association that led to the new bill proposal for parliament.

The CBR: Were there any challenges in creating the international programme or significant differences to the domestic programme?

Sperl, KB: There were several challenges, the main ones related to the ALM risk management of the pool. We have originated a cover pool that is fully protected against foreign currency risk and against interest rate risk. In order to achieve that, we had to implement specific loan allocation principles and mainly the cross-currency swap into the cover pool. The domestic cover pool is a simple one managed under the statutory eligibility criteria only.

The CBR: Will the international issuance replace some domestic issuance, or other sources of funding?

Sperl, KB (pictured): In our case, this is a likely scenario. The covered bonds are intended to enhance our euro funding base and stepwise replace the maturing portfolio of cross-currency swaps that we have relied upon. However, they will not replace any domestic issuances because there were, simply put, none outstanding at the KB Group level (they remain used for intragroup purposes).

The CBR: What were the key messages you focused on in the investor calls? Were there any other particular aspects that investors questioned?

Sperl, KB: The range of questions was quite wide, which is logical as it was our inaugural bond issue. Some investors may have discovered the macroeconomic strength of the Czech Republic and KB as an opportunity. Some of them required detailed information about the Czech legal framework and its comparison to the established German one. Almost all investors were interested in the Czech market practices related to mortgage loan origination and related credit risk management.

The CBR: Why did you decide to proceed with the first transaction on Wednesday?

Sperl, KB: We had a pre-agreed time window from Tuesday to Thursday so the middle was a good choice. On top of that, it was the 13th that brought us good luck.

The CBR: How do you feel the transaction went, with the level and composition of demand?

Sperl, KB: We were very positively surprised by a quick bookbuilding in the morning, and a strong book stayed with us also through the price tightening. The demand mainly came from Germany and that was in line with what we had expected.

The CBR: Were you satisfied with the final pricing versus other CEE issuance?

Sperl, KB: Yes, we are very satisfied, and we consider the result as a great success. You are right that the regional comparison is important for us, mainly to our Slovak peers. Finally, we have proven that the pick-up against Eurozone Slovak banks was not required by the market, or in other words the markets appreciated the strong position of the Czech Republic, KB and the high quality of our covered bond.

The CBR: What are your plans for future issuance?

Sperl, KB: In our plans we consider that covered bonds may become the main funding source in euros for KB, subject to evolving market conditions, of course. The reasons for our intended change of the funding mix are the funding cost efficiency and much appreciated price stability compared to our current main funding instrument – cross-currency swaps.

The CBR: This is the first Czech euro benchmark – do you anticipate other Czech names doing likewise?

Sperl, KB: As for our local peers, I would say that this depends very much on the group funding policies that are often defined at the parent group level. Nevertheless, it may be the case that our covered bond issue will become an inspiration for others and consequently a broader set of bonds would represent our country on the euro market.

The CBR: Are there any other aspects of your covered bond issuance or strategy that you would like to mention?

Sperl, KB: For us it was a unique learning experience to originate our first covered bond, and a thrilling event to take part in the market placement – all that under the excellent support of the syndicating banks, Barclays, JP Morgan and our parent SG.