Covered bonds took centre stage in the FIG market today (Tuesday), with deals for Danske, Dexia Kommunalbank and Santander Totta making it the busiest day in the primary market in two months. OP and Yorkshire are lining up deals in anticipation of an ECB meeting on Thursday.

Dexia Kommunalbank Deutschland (DKD) priced a long-anticipated euro benchmark, a Eu500m no grow five year public sector Pfandbrief, while Danske Bank and Portugal’s Banco Santander Totta joined the market today with Eu1bn seven year and Eu750m five year issues, respectively, to kickstart supply in June.

The three deals are the first fresh benchmark supply in covered bonds since 21 May. The last time there were three new issues in the market on the same day was 1 April, according to data from The Covered Bond Report. More new issues are expected for this week, with Finland’s OP Mortgage Bank having just announced the mandate for a five year issue, to be lead managed by Crédit Agricole, Deutsche Bank, Pohjola, Société Générale and UBS. Yorkshire Building Society is also in the pipeline and said to be aiming to come to market tomorrow (Wednesday). The UK issuer is eyeing a seven year deal, according to a syndicate banker at one of the leads – Danske, DZ, JP Morgan and Natixis.

A syndicate official noted that today’s deals highlighted the depth of the market, and another said that primary market activity is skewed toward covered bonds given anticipation of potential volatility around a European Central Bank meeting on Thursday, when the ECB is expected to cut interest rates and maybe also announce exceptional measures to stimulate lending to the real economy.

“The ECB moves can’t all be priced in, and there’s been a bit of a pick-up in SSA and covered trading activity,” said the syndicate banker. “Investors are focussed on the ECB.”

Banco Santander Totta will price a Eu750m five year mortgage-backed issue at 93bp over today on the back of some Eu1bn of orders. Leads BNP Paribas, Deutsche Bank, Goldman Sachs, RBS and Santander went out with initial price thoughts (IPTs) of the 95bp over area for the second new issue of the year from the Portuguese bank. After collecting Eu900m of orders, the leads went out with guidance unchanged from IPTs stage, before revising the spread and fixing it at 93bp over, at which point they set the size at Eu750m having collected Eu1bn of orders.

Syndicate bankers away from the leads said demand was muted but suggested this was not surprising given that peripheral spreads have rallied to reach tight levels. One said that the new issue looked tight versus an April 2017 issue that was launched earlier this year and was around 75bp over in the secondary market, and that a likely coupon of 1.625% was not that attractive for Portuguese five year debt. Another also said the new Totta deal looked expensive versus sovereign spreads, with the covered bond coming around 85bp through June 2019 Portuguese government bonds.

A syndicate official at one of the leads said he was happy with how the deal progressed, and put the new issue premium at 2bp-3bp.

“We had been monitoring the market for a few days, and decided this morning that now was the right time to issue,” he said. “Peripheral spreads have tightened a lot on secondary. Totta’s last deal, a Eu1bn three year, was priced at 88bp over and has tightened to 75bp over.”

He also noted that a Caixa Geral de Depósitos Eu750m five year, issued in January and priced at 188bp over, has tightened considerably, and was today trading at 110bp over.

According to data from The CBR, with Eu1bn of orders, the deal has attracted the least interest for a peripheral benchmark covered bond this year, for which order books have often been larger than Eu2bn.

DKD ‘huge success’, Danske as expected

Leads Barclays, Commerzbank, DZ Bank and HSBC have priced a Eu500m seven year public sector issue for Dexia Kommunalbank at 27bp over. The deal is DKD’s first euro benchmark Pfandbrief since 2011.

A syndicate official away from the leads said the new issue was “a huge success”.

“It looks like it was a solid transaction, with encouraging levels and great domestic support,” he said. “It was a huge success, highlighting the depth of the market and the willingness of issuers to pay up to enter the market.”

The leads had gone out with initial price thoughts of the low 30 over before setting guidance at the 29bp over area (plus/minus 2bp), with indications of interest having surpassed Eu800m. Books were closed with more than Eu1.8bn orders.

At 27bp over, the pricing is the widest for a euro benchmark from a German issuer in that maturity, excluding SME and aircraft-backed covered bonds, since Deutsche Pfandbriefbank priced a Eu500m five year at 38bp over in June 2012. The syndicate official away from the leads said that 27bp over represented a new issue premium (NIP) of 4bp-5bp, adding that this was needed given the situation the issuer is in. DKD is being wound down, a condition of the bail-out of its parent, Dexia Group, has placed it in wind-down under the conditions of its bail-out. Another syndicate banker away from the lead said that the spread on DKD’s deal looked wide, but acknowledged that the issuer is a special case.

Comparables used by the leads in coming up with the spread included DKD May 2018s and January 2017s at 14bp over and 17bp over, respectively, a Commerzbank June 2018 at 9.5bp through and a Deutsche Pfandbriefbank August 2018 mortgage Pfandbrief at 4bp over.

A lead syndicate banker said that the deal will appear attractive compared with other German public sector Pfandbriefe, in line with how the issuer trades versus comparables, and that the size of the order book suggests this is how investors viewed the transaction. However, at 27bp over the deal was coming at fair value to a couple of basis points back of the issuer’s curve, according to the syndicate official.

“At 27bp it’s not giving it away,” he said. “The deal was well-flagged, with a deal related roadshow, and there was good feedback yesterday in response to the maturity announcement.”

Danske Bank, meanwhile, is pricing a Eu1bn seven year covered bond, backed by Norwegian and Swedish residential mortgages from its Cover Pool “I”, at 13bp over.

Leads Crédit Agricole, Commerzbank, Danske, Natixis and UniCredit went out with IPTs at the mid to high teens over before revising the spread and going out with guidance of the 15bp over area, having collected IOIs in excess of Eu1bn. With more than Eu1.5bn of orders, guidance was revised to 14bp over (plus/minus 1bp) and the size was fixed at Eu1bn. The spread was then fixed at 13bp over, with nearly Eu1.6bn of orders placed for the deal from some 100 investors, according to a syndicate banker on the deal.

“The deal went as expected,” he said, noting that the order book was roughly the same size as that for Danske’s last euro benchmark covered bond, a Eu1bn seven year that was priced at 30bp over in February 2013. He put the new issue premium at 3bp over.

A syndicate official away from the leads had earlier in the morning said that at 15bp, the spread appeared to include a NIP of 2bp-3bp. Another said pricing of 13bp over was “bang-on”.