New euro benchmarks are expected to hit the covered bond market early next week in spite of the travails experienced this week, albeit with southern European names likely to headline supply as pricing expectations are recalibrated, particularly in respect of German names.

The asset class suffered the shock of Bausparkasse Schwäbisch Hall (BSH) pulling a €500m no-grow 10 year mortgage Pfandbrief mid-execution on Tuesday amid a wider primary market crunch, as other issuers encountered lacklustre demand and struggled to tighten pricing and achieve any significant oversubscription. The German bank and its leads had not offered a book update but had announced a final spread before saying the planned issue was being postponed.

“In Pfandbriefe, it’s a massive wake-up call,” said a covered bond banker. “I can’t recall ever having seen that in a decade – QE supported execution. But there is nothing now – the safety net has gone and this is the immediate impact.”

The Netherlands’ Aegon Bank was nevertheless able to demonstrate the viability of issuance post-BSH on Wednesday, selling a €500m seven year soft bullet on the back of some €700m of orders, albeit in the middle of guidance of the 32bp area and with the highest new issue premium of the week, some 10bp. Italy’s Banco BPM had meanwhile been able to tighten pricing 3bp and achieve a €1.3bn book for a €750m OBG on the day that BSH withdrew its deal.

Southern European names, including Italy and other jurisdictions, are seen as the best candidates for issuance in the coming week. One syndicate banker said two to four mandates are being lined up for early next week.

“We are most likely to see higher beta names or sectors that have already repriced,” he said, “where there won’t be so many questions about the pricing but more on the name or the tenor.

“I’m not sure there is an immediate German pipeline after what happened this week.”

The muted interest in Pfandbriefe has widely been attributed to perceptions that they offer poor relative value to other jurisdictions, notably France, which have already undergone significant repricing as CBPP3 ends and macro fundamentals evolve – unlike Germany.

BPCE SFH, for example, last Friday sold a €750m 10 year benchmark 1bp tighter (at 33bp) than where it issued a €1bn 10 year in January (albeit with the new issue being green and smaller), which was in turn 25bp wider than where it sold a €1bn 10 year in May 2022. By way of comparison, the anticipated re-offer spread of 21bp touted for BSH on Tuesday was 15bp wider than where it issued a €500m 10 year in May 2022, and 4bp wider than where it issued a €500m nine-and-a-half year in January.

“And the repricing, it’s not over yet,” said a banker, “because many investors are just selling Nordic and German names to either stay in cash or switch into southern European names or even French names.”

Supply considerations are also playing a part, said another syndicate banker. Austria’s Raiffeisen-Landesbank Steiermark, for example, issued a €500m three year at plus 27bp this week and although it achieved 3bp of tightening and was twice oversubscribed – making it one of the more successful trades of the week – it was priced flat to where Italy’s UniCredit issued a longer dated €1.75bn four year OBG two weeks previously. The banker attributed this to the glut of supply from Austria and particularly the RLB sector – even if OBG issuance is expected to be regular since Italy’s reopening, Italian banks are playing catch-up when it comes to supply.

In light of the difficulties faced this week, some issuers have been discussing whether or not to wait until September to issue, according to syndicate bankers.

“My view is that in September you might have a bigger book, but we will have wider spreads,” said one, “whereas now you can do a good trade with a satisfactory book and a price that might look a little bit wider than what you thought possible 10 days ago but which will ultimately be very satisfying.”

TLTRO repayments are an ongoing factor among supply considerations, with a bumper €477bn coming up for repayment on Wednesday.

Issuers meanwhile took advantage of opportunities away from the euro market this week. Bank of Montreal issued a $1bn (€915m, C$1.3bn) five year on Wednesday, while Royal Bank of Canada issued a A$850m (€530m, C$764m) three year, and Norwegian, Polish and UK issuers tapped their local currency markets.