The Covered Bond Report

News, analysis, data

Santander cédulas, BHH ESG star, but mart lacks conviction

Santander and Berlin Hyp sold stand-out €3.5bn and €1bn dual-tranche covered bonds today (Tuesday), but while each had “must-have” qualities that enabled them to meet strong demand and achieve notable outcomes, euro benchmark supply could remain tricky for lesser names.

As well as the Spanish and German deals, Austria’s Raiffeisenlandesbank Niederösterreich-Wien (RLB NÖ-Wien) sold a €500m seven year today, taking euro benchmark covered bond supply in the first two busines days of the year to €6.5bn after €1bn and €500m trades yesterday (Monday) for Erste Group Bank and Arkéa Public Sector SCF, respectively.

While the Santander and Berlin Hyp deals proved hits, syndicate bankers suggested broader sentiment towards covered bonds was not so strong, noting that a unsecured FIG supply had been taken down better in spite of a deluge of supply, with one noting issuers in some cases paying lower new issue premiums than they might have to pay for secured issuance.

“In the credit side of financials issuance, it’s all fine,” said another. “Whereas in the rates space, there’s still some underlying fragility. Investors tell us they are slightly nervous about the supply coming from both the covered and the SSA sectors, so they are not necessarily chasing deals.

“They are there and will engage for the right names – Berlin Hyp ticked every box and Santander had a great reception with its spreads being a no-brainer – but if it’s not a national champion or a bit on the longer side, things can be trickier.

Banco Santander leads Barclays, Commerzbank, Crédit Agricole, Deutsche, Natixis and Santander opened books with guidance of the mid-swaps plus 25bp area for a three year euro benchmark and the plus 48bp area for a seven year, expected ratings Aa1. After a little over an hour and a half, they reported books above €3bn, and after close to two-and-a-half hours, the spreads were set at 22bp and 47bp for the three and seven year tranches, respectively, on the back of books above €4.2bn, and the tranches were ultimately sized at €2.5bn and €1bn, with the aggregate final book over €6bn, split €4.6bn/€1.4bn.

Santander’s last benchmark cédulas was also a dual-tranche €3.5bn transaction, on 31 August, on that occasion split into five and 10 year benchmarks. Compatriot Bankinter issued the only cédulas since then, a €750m five-and-a-half year deal, on 22 November, at 40bp over mid-swaps, with the bank understood to have been keen to issue ahead of a potential pick-up in Spanish supply and widening of spreads, and a syndicate banker at one of Santander’s leads said it was similarly motivated.

“Particularly with Spain, you know this is very likely to happen,” he said. “Before QE and TLTROs, this was one of the biggest regions for covered bonds – even if I’m not saying it’s going to be as be as big as before, just take what happened in Austria last year: they went from €5bn of issuance to €13bn and look what it did to spreads. If an as an issuer you expect things to get very busy, then front-load and lock in the lower spreads.

“The deal went pretty quickly, in spite of all the supply in FIG today,” he added.

Based on the 2027 and 2032 issues Santander sold last August and four of its benchmarks in the 2025-2026 part of the curve, the leads saw fair value at 18bp for the new three year and the high 30s for the new seven year, implying new issue premiums of around 4bp and 9bp, respectively.

A syndicate banker away from the leads agreed with the anticipated direction of the market and said the spreads and new issue premiums – which currently look “super-attractive” to investors, hence the big books – should look cheap in the coming months.

“They will be glad that they paid to take out such size in January,” he added. “All the investor survey are saying covered bonds will widen over Q1, Q2.”

Barclays, Crédit Agricole, Erste, LBBW, Natixis and UniCredit opened books for Berlin Hyp’s dual tranche issue this morning, following a mandate announcement yesterday, with guidance of the mid-swaps flat area for the €500m no-grow May 2026 social tranche and the plus 13bp area for the €500m no-grow January 2033 green tranche, expected ratings Aaa. After around 50 minutes, they reported combined books above €2.1bn, of which more than €1.41bn, including €100m of joint lead manager interest, was for the shorter tranche and more than €685m, including €60m of JLM interest, for the longer. After around an hour and 40 minutes, with combined books above €3.35bn, the spread on the long three year social tranche was set at minus 4bp on the back of more than €2.3bn of orders, including €150m of JLM interest, and the 10 year green at 11bp on the back of more than €1.03bn of orders, including €85m of JLM interest.

“This was a very strategic transaction and Berlin Hyp had to have the ESG assets in place,” said a syndicate banker at one of the leads, “otherwise we could have done €1.75bn-€2bn on the shorter tranche and €750m for the 10s.”

The leads put fair value for the long three and 10 year tranches at minus 4bp and plus 4.5bp, respectively, implying new issue premiums of zero and 6bp-7bp.

“Even the longer tranche isn’t that much, considering others are paying far more,” said the lead banker. “We have seen NIPs in the double-digit range for six to eight years in some cases.”

As well as being the first sustainable and German benchmark covered bond issue of the year, Berlin Hyp’s deal included the first 10 year euro benchmark issuance since September and thus represented a test for the long end of the market.

“Even if the 10 year tranche was a little slower than the three year, demand is definitely there for core issuers, strong names,” said the lead banker. “In this context, Berlin Hyp is exactly the right name, having a particularly large and loyal investor base among the German savings banks community around which a trade can then be built with additional international demand. And the green element only helps compress the new issue premium.”

“German names in general can come closer to secondaries than others,” he added, “who will likely have to pay more in the way of new issue premium. Overall, the transaction will motivate other core issuers to follow suit.”

Indeed, BayernLB this afternoon mandated a €500m no-grow 10 year public sector Pfandbrief.

The last euro benchmark 10 year issuance was from Nordea Mortgage Bank and Deutsche Bank in September, with issuers subsequently focused on satisfying shorter-dated investor demand. A lead banker said while nothing dramatic had changed to encourage renewed demand at the long end, the decrease in the differential between three and 10 year swap spreads from minus 30bp-35bp to minus 18bp-19bp in the past couple of months had helped, as well as the widening of covered bond spreads – Nordea’s 10 year benchmark was priced at plus 11bp on 7 September and he suggested a new 10 year for the Finn might be priced in the high-teens to 20bp today.

After a mandate announcement yesterday, Raiffeisenlandesbank Niederösterreich-Wien (RLB NÖ-Wien) leads Barclays, BayernLB, Danske, Erste, RBI, SG and UniCredit opened books for a Austrian January 2030 euro benchmark mortgage Pfandbrief, expected rating Aaa, with guidance of the mid-swaps plus 35bp area. After around an hour and 50 minutes, they reported books above €700m, including €72m of JLM interest. The spread was ultimately set at plus 33bp for a €500m deal on the back of books above €800m, including €90m of JLM interests.

A lead syndicate banker said the outcome was mildly underwhelming in respect of the size that could be achieved.

“It’s fine – we got €500m done, with a bit of travel, and a new issue premium of around 10bp,” he said. “These are parameters that are OK in today’s market, but we were just a bit disappointed with the size of the order book – it didn’t allow for a bigger deal.”

Euro benchmark is expected to remain brisk. Following mandate announcements today, Caisse de Refinancement de l’Habitat is expected with a seven year euro benchmark, Aareal Bank is due with an October 2027 euro benchmark mortgage Pfandbrief, and Bawag PSK has mandated a six year euro benchmark mortgage Pfandbrief.

Westpac Banking Corporation is set to open sterling supply with a five year Sonia-linked covered bond, following a mandate announcement today. Barclays, HSBC, Lloyds, NatWest, RBC and Westpac are leads for what will be the first sterling benchmark since a £1bn (€1.13bn) three year FRN on 7 December.