Canadian Imperial Bank of Commerce (CIBC) today (Monday) successfully reopened the FIG market in euros with the first benchmark covered bond since 9 March, a €1.5bn four year deal that achieved a book of some €1.8bn and demonstrated the instrument’s qualities amid ongoing concerns about the banking sector.

The last euro benchmark was a €750m nine year issued by Caffil on 9 March, with the collapse of Silicon Valley Bank and subsequent market turmoil – including the emergency takeover of Credit Suisse by UBS – putting paid to any issuance plans, with no euro supply emerging in other FIG formats.

But with ECB and Fed meetings out the way – and despite a renewed bout of volatility and weakness in bank stocks, notably Deutsche Bank, on Friday – CIBC made its move this morning, reopening FIG issuance in euros (corporate-financial RCI Banque was also in the market).

“With what we’ve had these past two weeks, these are the markets that the covered bond is designed for,” said a syndicate banker away from the leads. “CIBC was one of the likely candidates and it’s actually the trade we should all have expected: a defensive tenor, strong name, the best of all asset classes you can choose in FIG.”

Bank stocks opened positively in Europe this morning and another banker said Friday’s price action had seemed overdone.

“We were all a bit puzzled about the bearish sentiment and nobody really understood why Deutsche Bank was in focus,” he said. “Everyone was looking for the reason, but no one found a convincing one.

“And therefore this morning, while we know that there are still questions about the capital side of banks, there is no question that a covered bond will work. The fundamental supply-demand dynamics are still positive, and there has been limited supply recently but good demand, while spreads didn’t really react much during the volatility, partly thanks to the ongoing ECB support.”

LBBW analysts on Friday noted that, according to iBoxx indices, covered bonds had widened just 3bp since the beginning of March compared with around 40bp for senior preferred and 60bp for senior non-preferred, even if the unsecured paper had recovered somewhat. Covered bonds’ relative value versus Bunds meanwhile improved amid the volatility, to around 95bp, they added.

Leads CIBC, Danske, HSBC, LBBW and Natixis opened books for the Canadian reopener at around 10.00 CET this morning with initial guidance of the mid-swaps plus 35bp area for a euro benchmark-sized March 2027 issue, expected ratings Aaa/AAA (Moody’s/Fitch). After around an hour and 25 minutes, they reported books above €1.25bn, excluding joint lead manager interest, and after close to an hour and a half, they set the spread at 33bp on the back of books above €1.65bn. The deal was ultimately sized at €1.5bn (C$2.22bn) on the back of a book above €1.8bn, excluding JLM interest.

“It’s a very strong outcome,” said a banker at one of the leads. “We had been monitoring the market for a few sessions, but given the market backdrop and rates volatility, we waited as we as a syndicate group and issuer wanted to get things right and leave the market in a better place.

“We had an early go/no-go call this morning, pushed the decision back a bit, then felt conditions were right, saw that there was no competing supply, and went ahead with it. The book built briskly and the result is a very sensible transaction that paves the way for more issuance.”

Syndicate bankers away from the leads welcomed the reopener.

“It’s definitely a good step,” said one, “being the first issue we’ve seen in over two weeks. The new issue concession is a little higher than what we saw in early March, and the book size is lower than we might normally expect, but it’s well understood that this is necessary amid the caution that still prevails.”

Fair value was seen at around 26bp-27bp by bankers at and away from the leads, implying a new issue premium of 6bp-7bp.

Another banker away from the leads said the initial guidance was in line with where he would have started, offering a pick-up of 8bp-9bp versus fair value. CIBC’s re-offer spread of 33bp compares with 22bp and 40bp for €3.5bn three and €1.5bn seven year tranches, respectively, sold by Toronto-Dominion on 6 March, while TD’s NIPs were put at around 4bp and 6bp.

“The 6bp concession is in line with what we’ve seen at times this year,” said the lead banker.

CIBC’s last euro benchmark was a €2.5bn four year in March 2022, which was its largest covered bond in the currency and reopened the market at that time after the Russian invasion of Ukraine.

“CIBC has always been very committed to the euro market,” added the lead banker. “It is a very well known and well liked name from a strong jurisdiction, and the maturity was a good fit for the issuer while appealing to the deepest part of the investor base.

“The move by 2bp and clarity on pricing was appreciated by investors – it is important to demonstrate leadership in this market by fixing the parameters early on.”

Barring further market shocks, syndicate bankers expect CIBC’s trade to be the first of more sustained issuance in covered bonds, particularly with demand for other FIG asset classes potentially remaining fragile.

“The pressure on the credit side for banks will continue for some time,” said one, “so when banks are looking for some funding or liquidity and have collateral available, it’ll be recommended to go for a covered bond now instead of senior – even if a senior preferred from a strong name would still work.

“I would expect some issuers to perhaps switch their full year plans and frontload covered now and hope for the best for senior or whatever at a later stage.”