Commonwealth Bank of Australia is aiming to price the first domestic Australian covered bond tomorrow (Tuesday). Some market participants said the indicative pricing is significantly wider than the bank’s senior unsecured levels, raising questions over the deal’s rationale.

CBA on Friday announced its plans to sell an Australian dollar denominated covered bond, having mandated CBA, Citibank, HSBC and Westpac for the first covered bond for an Australian issuer in its own currency. The lead managers are understood to have been registering interest today (Monday) for the deal, which comes with a five year maturity and is being marketed in the 180bp-190bp over swaps range.

Commonwealth Bank building, Sydney

CBA’s domestic issue comes after the issuer on 4 January sold its first covered bond and the first Australian euro benchmark, a Eu1.5bn five year deal that was priced at 100bp over mid-swaps.

Lyn Cobley, treasurer at CBA, said that as the largest Australian bank CBA is often the issuer that opens or reopens a market.

“It made logical sense to us given relative market availability and pricing that this was a good market to open up for covered bond issuance,” she said. “Covered bonds are still very new to this market and a number of investors still need to get approval to buy covered bonds as a product.”

She said that CBA’s deal looked set to be very well received.

“We have a substantial book at this stage based on the interest delivered to us in the Australian and Asian time, and we will see what European interest comes in overnight.”

Comparisons with the funding level achieved in the euro market will depend on where the domestic issue is finally priced, but Cobley said that pricing in the Australian dollar market is relatively attractive because of the lack of swap costs.

Syndicate bankers away from the transaction said that the level on CBA’s covered bond was around 30bp wider than the bank’s senior unsecured levels, with one saying a five year unsecured deal had recently traded at 155bp over.

“It’s a bit strange that they would add that much,” he said.

A level of 190bp over in Aussie dollars is equivalent to around 80bp over Euribor, he added.

Another syndicate banker making reference to the level on CBA’s domestic covered bond said that it was “a shocker” and would reprice the Australian market, representing around a 30bp pick-up to senior unsecured levels.

“I’m not sure I understand the rationale for that,” he added.

He referred to CBA’s move as a “semi-uneconomic decision”, but held out the possibility that the issuer could size a deal large enough for it to work out cheaper than funding obtainable in the euro market.