Royal Bank of Canada kept the size of a five year covered bond issued on Thursday at Eu1bn because the performance of Eu1.5bn-Eu2bn benchmarks shows the market no longer rewards issuers for larger sizes, according to a treasury official at the Canadian bank.

The deal was a Eu1bn no-grow and came after RBC sold a Eu2bn seven year issue in July 2013 and a Eu1.5bn five year last October. Syndicate officials away from the leads of last week’s new issue had suggested that the underperformance of previous RBC issuance could have been an influence on the execution of the deal.

David Power, vice president, corporate treasury at RBC, told The Covered Bond Report that although the issuer’s bonds had been performing well going into the new issue, the performance of larger issues had led the Canadian bank to reconsider the appropriate size of deals.

“The broader picture is that those were very large transactions and we’ve just adjusted our approach to be more in line with where the market has moved,” he said. “There was a time when those sized transactions were not uncommon, but the market, by virtue of how it votes through pricing, really wants transactions more in the Eu1bn range for issuers like ourselves, so we are really just adjusting to that reality.

“There may be some investors who say they like the larger deals, but that’s not evident through the pricing.”

For the new issue, leads Deutsche Bank, Natixis, RBC and Société Générale went out with initial price thoughts of the 10bp over mid-swaps area, before setting guidance at the 8bp over area and confirming the size at Eu1bn, with indications of interest in excess of Eu1bn. The spread was then fixed at 7bp over, with more than Eu1.25bn of orders.

The pricing of 7bp over was wider than the 5bp re-offer of the Eu1.5bn five year launched in October. According to syndicate officials away from the leads, the previous five year had traded as wide as 11bp over, although last week was at around 2bp over and, with last year’s seven year at 10bp over, fair value for a new five year was put by the leads at around 6bp over – where Bank of Montreal and Bank of Nova Scotia 2019s were also trading.

“The previous two deals were a bit different, in that we did not have such a full curve before, which made things a little bit different,” noted the lead syndicate official. “We now have a curve, and while Thursday’s transaction was priced a little wider, it’s important to note that the coupon on the October deal was 1.25% and the coupon for today’s deal was 0.75%.”

He added that although the issue was priced 2bp wider than the re-offer of October’s five year, the deal was tighter than the last couple of Canadian issues. Bank of Nova Scotia and Bank of Montreal priced Eu1bn five year benchmarks at 9bp over in late March and late April, respectively.

The lead syndicate official said that RBC was aware of a few Canadian issuers whose names have been in the pipeline because of roadshows, namely Bank of Montreal, Bank of Nova Scotia and Caisse centrale Desjardins du Québec. However, he said that while the issuer was keen to avoid crowding the market with Canadian supply, the potential for issuance from these Canadian banks had not played a key role in the timing of RBC’s deal.

“Canadian covered bonds are considered by investors to be a low-beta option, in a similar vein to covered bonds from Scandinavia, Dutch and UK issuers,” he added. “The issuer felt that the market had had limited supply from these low-beta jurisdictions and decided to capitalise on market hunger for covered bonds and issue.”

RBC’s Power said that the five year maturity was chosen because it was attractive on a dollar Libor basis and because it is in the middle of the range of maturities the bank typically considers for covered bond issuance.

The lead syndicate official added that the deal means that RBC has the most populated covered bond curve from a Canadian issuer, and as such is “the best marker” for other Canadian issuers.

Germany and Austria were allocated 36%, the UK and Ireland 21%, Switzerland 15%, France 10%, Asia 8%, the Benelux 3%, southern Europe 2%, and others 5%. Banks and private banks took 58%, central banks and SSAs 21%, fund managers 8%, insurance companies and pension funds 5%, and others 8%.