Bank Leumi, the largest Israeli bank, successfully led the country into the covered bond market on Tuesday, as its €750m five year structured debut attracted €4.6bn of orders, opening up new investors for Israel and its banking industry, according to head of capital markets Omer Ziv.

The deal is the first off a EUR3bn structured covered bond programme. Israel’s market-leading bank, with a 29% market share, Bank Leumi has a ILS 154bn (€42bn) mortgage book.

Bank Leumi was the first Israeli bank to tap international debt markets, in 2020, and has issued senior and Tier 2 bonds in dollars, but had not previously issued in euros.

“We have needs not only in shekels, but also in foreign currencies – euros, dollars and so on,” Ziv, head of capital markets at Bank Leumi, told The Covered Bond Report. “Bank Leumi doesn’t take any foreign exchange exposure, but finances loans in euros, for example, by sourcing funding in euros. So we were looking for a vehicle that would be a source for these needs on top of deposits.

“Also, due to the war, there was pressure on the rating of Israel and Israeli banks, so we had been seeking out a product that would give bondholders more security and hence achieve higher ratings.”

The bank is rated Baa1 (negative outlook), BBB+ and A- by Moody’s, S&P and Fitch, respectively, having been downgraded during the conflict, while Israel has faced downgrades leaving it at Baa1, A and A, with the Moody’s and Fitch ratings on negative outlook.

Bank Leumi therefore turned to covered bonds. And without specific legislation in Israel, Bank Leumi began working on a structured programme, with Barclays as sole structuring advisor.

“Our strategy was to be as close as we could to the European Directive,” said Ziv. “In every aspect, we took a conservative approach in order to avoid any concerns over our structure.”

Using their covered bond rating methodologies, Moody’s and Fitch assigned expected ratings of Aa3 and AA- to Bank Leumi’s issuance.

“We looked at the European best practices, with the Directive there, and also at non-EEA countries like Canada, Australia and Singapore that use the SPV guarantor structure, and suggested Bank Leumi commit to certain provisions and features so that this has everything an investor would expect to find when buying a covered bond,” said Elena Bortolotti, global head of covered bonds and head of structured solutions for EME at Barclays.

The issuer is also committed to providing, on a quarterly basis, the Harmonised Transparency Template (HTT), despite not being eligible for the Covered Bond Label (which is only available for legislative covered bonds).

“The market’s reaction has been extremely welcoming and positive,” said Bortolotti.

As a structured covered bond from Israel, Bank Leumi’s issuance is neither LCR‑eligible nor ECB-eligible. Furthermore, as it is not eligible to be recognised as a covered bond under the applicable regulatory frameworks, the issuance could instead be treated as senior unsecured debt. It is expected to qualify for inclusion in the iBoxx EUR Benchmark Index as well as the Bloomberg covered bond indices.

In light of its characteristics, the leads drew attention to where structured covered bonds, including SMBC and UBS, were trading, but also – given the Japanese and Swiss covered bonds’ triple-A ratings – where legislative covered bonds with similar ratings to Bank Leumi’s were seen.

Having prepared its programme, and after the adoption of a peace plan in October, the bank eyed the beginning of the year for its inaugural issuance.

“Firstly, January is one of the best times of year to come to the international market, so we usually target it,” said Ziv (pictured). “Secondly, we have been considering the issuance for a long time, but we waited until the war ended.”

He noted that two other Israeli bond issues had already been executed this month.

“We also saw that currently demand around covered bonds would work in our favour,” added Ziv.

The bank announced its planned debut on Tuesday of last week (6 January), then held a roadshow until Monday.

On Tuesday morning, leads Barclays (global coordinator), Goldman Sachs, JP Morgan and UBS opened books with guidance of the mid-swaps plus 78bp area for the €750m (ILS 2.8bn) January 2031 transaction, expected ratings Aa3/AA- (Moody’s/Fitch). After a little over two hours, they reported books above €3.5bn, including €400m of joint lead manager interest, and after around four hours and 10 minutes, they set the spread at 68bp on the back of books above €4.1bn. The final order book was around €4.6bn, including €450m of JLM interest.

“We are delighted with the issuance,” said Ziv. “The level of demand was really amazing. And after we closed the book, there were even more investors trying to enter at the closing price. We could have taken it tighter, but because it is our first issuance, we wanted to leave something on the table for investors.”

“There were lots of investors who had never invested in Bank Leumi – we saw demand from Switzerland, Germany, Portugal, Spain, the Middle East, and other countries and also many of them were not those we typically see investing in banks,” said Ziv.

As well as the structure of Bank Leumi’s programme and market conditions, he attributed the strength of demand to investors being impressed by the performance of the Israeli economy and the bank, particularly against the geopolitical backdrop they have faced.

“They were impressed by the fact that, although Israel was involved in a war for two years – its longest since being established almost 80 years ago – GDP growth was 2.8% in 2025 and is in 2026 expected by the Bank of Israel to be 5.2%, which is three times that forecast for the OECD,” said Ziv. “And furthermore, that Bank Leumi, in years of war, has consistently delivered strong ROE of 15%-16%. Finally, Bank Leumi has one of the lowest cost-to-income ratios in the world.

“I know that a lot of banks speak about technology,” he added, “but the fact that we have year after year been able to improve our cost to income ratio – now at 27% – speaks for itself. Israel is known to have a very strong high tech sector, and we have implemented the most advanced technology not only in operational activity and in getting our customers to access most of their services digitally, but also in underwriting systems and data analysis, which also contributes to our very low credit loss expense ratio year after year.”

Having inaugurated its programme, Bank Leumi’s aim is to build a covered bond curve in the international market, said Ziv. Until dedicated covered bond legislation is enacted, any issuance will require approval from the Bank of Israel.

Other Israeli banks are meanwhile expected to follow in Bank Leumi’s footsteps.

“We are very proud to have been the pioneer of covered bonds in Israel,” he said. “It has opened the window to significant new investment, not only for Bank Leumi, but for the Israeli economy and the banking industry.

“There is a lot of enthusiasm, because we issued 20bp inside the sovereign. I believe that not only banks here in Israel, but also other financial institutions, understand the advantages of the instrument to their liability structure and are now looking at covered bonds.”

The Bank of Israel is considering establishing a regulatory framework for covered bonds, according to Ziv, which would cement the position of the instrument in the country and also offer the prospect of tighter pricing.

The new issue had also already tightened by 5bp yesterday (Thursday) morning, and he noted that performance could be boosted by increasing participation among Israeli investors, who are only able to buy in the secondary market and only now getting more familiar with covered bonds.