Canadian Imperial Bank of Commerce sold its first euro benchmark in a year last week after having met initial TLAC requirements and on the back of historically tight spread levels, CIBC’s Wojtek Niebrzydowski told The CBR, with the €1bn deal allowing it to meet its commitment to investors.

CIBC’s last previous euro benchmark was a €750m three-and-a-half year deal in March 2020 priced at 48bp over mid-swaps (tapped for €250m the following month), as it joined its compatriots in accessing wholesale funding in covered bond format in the wake of the first wave of the Covid-19 pandemic in Europe, which had blown out spreads.

According to Wojtek Niebrzydowski, vice president, treasury, at CIBC, the bank has in the interim focused on building its TLAC buffer.

“Unlike many jurisdictions in Europe, we did not get from our federal regulator a deferral of implementation, which in 2018 was set for November this year,” he told The CBR.

“The regulator is and has been confident that Canadian GSIBs and DSIBs are fully able to access markets to source bail-in-able TLAC funding and be compliant as of the required date,” he added, “so that’s a vote of confidence in the Canadian financial system.”

With CIBC effectively compliant as of Q4 2020 and remaining so – subject to RWA developments – the bank has turned its attention to optimising its funding.

“The bank continues to have certain requirements for term funding,” said Niebrzydowski, “and the cheapest way of meeting those is issuing covered rather than relatively expensive bail-in-able senior unsecured.”

Meanwhile, an expected consumer-driven economic rebound – with the Bank of Canada, for example, forecasting GDP growth of 6.75% for 2021 – could add to funding needs.

Beyond covered bonds’ usual funding advantage, Niebrzydowski noted that market conditions are exceptional.

“Credit spreads continue to be at historical lows,” he said, “and while it’s possible to muster an argument that they could go tighter, I’d say it’s more likely that they will widen than tighten or stay at these levels. And if you take that view, a good strategy is to source some longer term money, particularly with the euro credit curve flat in general, and also flat if you look at it on a post-cross-currency swap basis.”

Finally, added Niebrzydowski, approaching the market with a new euro benchmark allowed CIBC to make good on its commitment to investors.

“For several years we have stated publicly at conferences as well as in numerous one-on-one and group investor meetings that the bank’s strategy is to maintain our presence in key funding markets,” he said, “and euro covered clearly comes under that definition.”

CIBC thus entered the market on Thursday of last week (22 April), with leads BNP Paribas, CIBC, DZ, HSBC and UBS pricing the €1bn (C$1.5bn) eight year transaction at 5bp over mid-swaps on the back of a final book of €2.4bn, following initial guidance of the 9bp area. Syndicate bankers deemed the re-offer spread flat to fair value.

“Personally, I expected the deal to go well,” said Niebrzydowski. “Having said that, it went better than my expectations. The speed at which the book built was one of the fastest I’ve seen for quite some time, and the quality and number of accounts were similarly impressive. There were a few drops after we announced the final spread and the size, but that was offset by new orders coming in.

“As for the level, everything I’ve seen and heard suggests we priced at fair value with no concession, which is, again, something that you’d want to see.”

Further covered bond issuance this year will be looked at on a case by case basis, said Niebrzydowski, but will need to take into account the hoped-for economic growth and ongoing TLAC compliance.

Earlier this month the Office of the Superintendent of Financial Institutions ended a temporary increase in Canada’s covered bond issuance limit that was instigated after the pandemic hit financial markets last year, with the level falling back from 10% to 5.5% for on-balance sheets assets collateralising covered bonds. The loosening was aimed at allowing Canadian banks to use covered bonds to access central bank funding.

While the flexibility has raised hopes among some market participants that the 5.5% limit – which is among the most restrictive limits globally – could at some point be revised, Niebrzydowski is philosophical about the situation.

“We’ve been working on this for probably 13 years, so I hesitate to make any predictions,” he said. “It was good to see that in combination between OSFI and Bank of Canada, we as the financial industry here were for the first time ever allowed to issue Canadian dollar-denominated covereds solely for the purpose of the newly and temporarily established Bank of Canada term repo, which is something we had advocated for before.

“That has now been reined in. You could interpret that as another regulatory and central bank vote of confidence in the resilience of the Canadian banking system.”

Another long-running topic of discussion for Canadian covered bonds – whether or not they will be taken up by smaller issuers – has nevertheless seen progress this year, with Equitable Bank nearing issuance and Laurentian Bank having debuted domestically yesterday (Thursday).

“It’s good to see that this funding programme is increasing in potential future usage and popularity among smaller institutions,” said Niebrzydowski. “It will be interesting to see how the first euro transactions go in addition to yesterday’s Canadian dollar trade, as we would in euros be expecting sub-benchmark type issuance with much more limited frequency, which has previously tended to come from EU names.

“I wish both of the institutions luck in developing their respective programmes and will be watching any market developments with interest.”