Investors submitted 10.3% of Eu16.5bn worth of cédulas in a Bankia tender offer that closed on Tuesday, with the issuer deciding to buy back Eu1.22bn of bonds, more than a targeted amount of Eu750m, which analysts said will have a positive impact on OC levels.

The Spanish issuer launched the tender offer on Friday, 1 March and announced results yesterday (Wednesday). The tender offer applied to nine cédulas issued by Caja Madrid with a total face value of Eu16.5bn, with the Eu750m targeted amount representing 4.5% of the overall bonds included in the offer.

Valid tender instructions totalling Eu1.699bn were received across all covered bonds included in the offer, according to a banker at one of the joint dealer managers – Bankia, Deutsche Bank and JP Morgan – and Eu1.22bn were accepted, representing 7.4% of the bonds on offer.

Accepted tendered bonds worth Eu294.4m and Eu233.9m of cédulas maturing 2006 and 2005, respectively, were the biggest individual positions.

The Eu1.22bn buyback represents around 2% of the issuer’s total outstanding cédulas hipotecarias, including private placements and retained bonds, according to Florian Eichert, senior covered bond analyst at Crédit Agricole.

“This tender operation is slightly positive for OC levels as eligible OC moves up from 30% to 33% and total OC from 74% to 79%,” he said.

Duane Hebert, head of liability management at Deutsche Bank, said that the results of the offer demonstrate the efficiency of the unmodified Dutch auction format.

In an unmodified Dutch auction, an investor has the ability to submit the price at which he or she is willing to tender the particular series of bonds for repurchase by the issuer. Following the completion of the offer, each holder receives the price specified by them as consideration for their notes – in the event their bonds are accepted for purchase – and not the same clearing price, as is the case in a modified Dutch auction.

A liability management banker away from the tender offer said that unmodified Dutch auctions are the most aggressive form of auction. The take-up in Bankia’s tender offer was strong, he added, after a “dramatic” increase from the stated repurchase target amount of Eu750m to the Eu1.22bn buyback.

“I’ve never seen that level of upscale before,” he said, adding that it raises the question of whether the Eu750m target was misleading and whether it may have affected the prices at which investors bid for the cédulas.

The joint dealers disclosed the aggregate cost of repurchasing the accepted bonds in a given series, which allows for an average tender price to be calculated, and according to a covered bond analyst this is Eu0.9889, but The Covered Bond Report was unable to find out what this translates to in spread terms, including relative to secondary market levels. The analyst said it is difficult to read much into this average price or to assess the profit the issuer made, also because it will have swap costs related to the individual bond series.

“I was surprised that they bought back more,” he said, “but from investors’ perspective it is positive because the increase in eligible OC gives the issuer a buffer to do retain issuance if need be.”

A banker on the tender offer said it is not uncommon to increase caps, and that the magnitude of the upscale in Bankia’s case was not abnormal in his view. He wondered why more investors did not at least submit a bid.

“Portfolio managers are not doing themselves any favours by not submitting a price,” he said. “It’s a free option for them.”

He acknowledged that non-price related factors to do with accounting, for example, could have something to do with why some investors do not participate, and that many covered bonds are held-to-maturity, but said that this was unlikely to be a full explanation.