Bank of Nova Scotia priced the largest ever single-tranche US dollar covered bond yesterday, a $3.5bn five year that also achieved a historically tight level, with bankers attributing the Canadian’s feat to a lack of supply in the US market and investor demand for such triple-A five year paper.

The $3.5bn (€3.01bn, C$4.42bn) deal beats two $3bn five year deals from Toronto-Dominion to claim the title of largest single-tranche dollar benchmark covered bond. TD’s last $3bn trade was in March 2012, while a previous one in September 2011 was part of a $5bn two-tranche transaction that also included a $2bn three year.

Leads Bank of Nova Scotia (Scotiabank, BNS), Credit Suisse, Deutsche and HSBC went out yesterday morning European time with initial price thoughts of the mid-swaps plus 20bp area for the October 2026 Reg S/144A dollar benchmark, expected rating triple-A. Ahead of the US open, they reported books above $1.5bn, excluding joint lead manager interest. A $3.5bn deal was ultimately priced at 17bp, with the final order book some $3.9bn.

Syndicate bankers at and away from the leads were amazed at the outcome.

“It’s a really, really huge issue volume,” said one. “How did they manage to get that? It’s rather KfW-style or EU-style than BNS-style.”

Scotiabank’s deal comes four weeks after Royal Bank of Canada issued a $2.5bn five year benchmark, which was the biggest single-tranche benchmark covered bond in any currency in over five years. Scotiabank’s pricing was 1bp inside RBC’s and, according to a banker at one of the leads, is the tightest ever pricing on a dollar benchmark covered bond versus US Treasuries.

“This is a phenomenal trade, size and price-wise” he said. “For once I am rendered quite speechless.”

He attributed the outcome principally to the lack of covered bond issuance in dollars, with 144A supply this year having been limited to just two deals, a $2bn five year for CIBC in June and RBC’s five year. Syndicate bankers away from the leads echoed this.

“$3.5bn is truly gigantic,” said one, “and it was very successful. Many genuine dollar investors were starving for something like this, a big triple-A North American issuer doing a covered bond. It’s not the most generic of covered bond markets, but it has been so dramatically undersupplied – even in comparison to euros.”

Another syndicate banker said relative value versus SSAs contributed to demand for the asset class, with the covered bond offering a “huge” pick-up versus triple-A names coming around flat to 1bp through mid-swaps.

“The shorter five year maturity is exactly what investors are looking for at the moment,” he added.

Scotiabank’s last dollar benchmark was a $900m three year in March 2020, issued just after the peak of Covid-induced market volatility, and the lead banker said the issuer’s overall rarity in recent years was a further factor in demand for the new issue.

“The book was the Who’s Who of covered bond investors,” he added.

Another lead banker said the book included both previous covered bond investors returning to the product, and accounts new to the asset class.

“It’s working super-well,” he added.

The Canadian bank’s dollar benchmark follows a €1.5bn eight year deal on 8 September and a £1.3bn five year FRN in June.

Lead bankers said the pricing of the new issue was flat to funding available in those markets today.

“What was quite phenomenal was the fact that they were able to print a bit inside RBC,” said the second, “and on a cross-currency basis versus euros and sterling, they priced flat to where they would’ve printed in those two currencies for a size that was, quite frankly, ginormous. That’s quite encouraging, and it is quoted a little tighter in secondary as well, so the size actually hasn’t had an impact from the secondary standpoint either.”

In spite of the size and success of Scotiabank’s trade, the lead bankers were measured in their expectations for follow-up issuance.

“Many issuers don’t necessarily have the programmes set up,” said the first, “and often euro pricing is more competitive, particularly in longer maturities, as the covered bond market in dollars really only goes out to five years, and since many issuers use their covered bond programmes for longer dated issuance, they prefer to do euros.

“But for the people who are interested in the belly of the curve, it’s a great market.”

Scotiabank’s new issue is also the biggest single-tranche syndicated benchmark covered bond in any currency in over a decade, although still falls short of the euro high of €5bn set by Allgemeine Hypothekenbank in 1999.