A Eu2bn three year cédulas for Santander yesterday (Wednesday) bodes well for peripheral follow-ups, said bankers, who cited its spread, credit story and a lack of three year deals among factors in the issue’s success, while a Santander official welcomed the Eu8.5bn book.

Leads Barclays Capital, Citigroup, Natixis and Santander priced the issue at 210bp over mid-swaps, 20bp tighter than initial guidance of the 230bp over area. Around Eu8.5bn of orders were placed for what was the first benchmark cédulas since the end of May 2011, a Eu1bn five year cédulas territoriales Santander issue. A syndicate banker at one of the leads noted that the deal is also only the second issue from a non-core country financial institution in 2012.

No new cédulas transactions had been publicly announced by press time, although syndicate officials were positive about Santander’s deal for cédulas issuance in general. Catalunya Banc has launched a buy-back, targeting a cash repurchase of Eu900m of covered bonds and asset-backed securities, with Deutsche Bank, JP Morgan and Natixis mandated as dealers.

Antonio Torío, director, capital markets funding at Banco Santander, told The Covered Bond Report that the issuer felt it was important for it to reopen the Spanish market after a long period without benchmark cédulas supply.

“We thought that a covered bond was the right product,” he added. “It is a safe product that came with an appealing spread for investors.”

He said that the issuer is very satisfied with the transaction.

“We tried to make an attractive proposition to investors and in the end we achieved a very good investor mix,” he said. “There was good Spanish presence but also diversified international participation.”

German, Austrian and Swiss investors took 35% of the bonds, followed by Spain with 27%, the UK and Ireland 15%, France 7%, the Benelux 4%, the Nordics 4%, Italy 3%, Portugal 1%, and others 4%.

Torío also pointed out that around 270 accounts participated in the deal and that the composition by type of investors was positive. Fund managers were allocated 42%, banks 34%, insurance companies and pension funds 14%, central banks and agencies 9%, and others 1%.

“So frankly we met all of our objectives for the deal,” said Torío. “We were fortunate that the demand was so strong when we opened the books that we could tighten the level.”

Tim Michael, FIG syndicate at Citi, said that the level of demand exceeded expectations. He attributed the strong demand to a combination of factors including a fundamental appreciation of the credit, the lack of cédulas supply, the appeal of the spread and less than anticipated benchmark covered bond issuance in general this year.

“At the sovereign level, the peripheral region has benefitted strongly from the recent uptick in risk appetite and the positive implications of the LTRO has been evident in the bank space,” he added. “The LTRO is partly responsible for supply generally being less than anticipated.

“So there are fewer offerings, but accounts are still keen to participate in covered bonds, and all this adds up to demand for fairly priced transactions.”

Initial guidance of the 230bp over area included a new issue premium of around 20bp, according to Michael, with the eventual re-offer spread of 210bp over coming flat to through Santander’s curve in the secondary market.

Michael acknowledged that Santander’s transaction was perhaps the first benchmark covered bond this year to price without a new issue concession, or at least a smaller than average premium, but played down the role of a pick-up over secondaries in comparison with other deals this year.

“In Santander’s case the spread was significant in outright terms and with a 3.25% coupon the demand we saw allowed us to price the deal flat to secondaries.”

The new issue was priced at a slight discount, but traded as high as 100.625 this morning, according to Michael.

“It’s a solid performance,” he said, adding that the pricing has led to a tightening of other cédulas spreads.

Michael acknowledged the possibility of Santander’s trade representing a carry trade opportunity for bank treasury accounts, but said that this was not a material driver for demand.

“Accounts fundamentally like the credit,” he said. “If you look at Santander’s results, in Q4 for the first time more than 50% of earnings came from Latin America, which is very significant and goes to the diversity of the bank’s operations. And they achieved their EBA core capital ratio.”

Bankers away from the leads complimented the trade, saying they also would have liked to be involved.

“It’s such a blowout deal, and such an obvious one,” said one. “It was kind of inevitable that they would come out after their results.”

A syndicate official said that Santander paid a high price in absolute terms, but that the covered bond market provided it with funding at a good level compared with a senior unsecured issue. Compared with the cost of borrowing via the ECB’s LTRO the covered bond transaction was of course expensive, he said.

Another syndicate banker said that Santander’s transaction was “hugely successful” for several reasons, some of them specific to the issuer and the execution of the transaction and some of them of a general relevance. The general reasons he cited included a scarcity of three year bullet supply from European banks this year, including senior unsecured issuance.

“Santander chose a maturity that has been untouched for obvious reasons,” he said, “but as an investor you still have three year maturity needs.”

A Eu500m May 2015 issue for Bank of New Zealand is the only euro benchmark covered bond to have come in the three year maturity bucket this year.

The syndicate official was bullish on the outlook for further benchmark cédulas supply, saying that around Eu7bn of unallocated demand for Santander’s new issue bodes well for other Spanish issuers, the three year maturity bracket, and the cédulas market.

He said that he expects other Spanish issuers to follow suit with new issues, and that while it is politically important for them to prove that they have access to the capital markets it also makes sense from a business perspective.

“Sure, use the LTROs but you still need other sources of funding,” he said. “It’s the cost of being in the business.”

A broader reopening of the Spanish market will eventually encourage demand for other peripheral paper, such as from Italy, he added.

But other bankers were less confident. One suggested the outlook for follow-up cédulas supply was less clear, because while demand is strong issuer interest is less certain.

A potential Spanish issuer, Banco Bilbao Vizcaya Argentaria, today (Thursday) releases results for the fourth quarter of 2011.

Another said he does not expect much follow-up issuance from Spain, with BBVA, for example, said to not have enough collateral at the moment to launch a new issue.

“Issuers are looking for opportunities, but I don’t think we’ll see a classic cut-and-paste deal,” he said.

He suggested that Italian supply could be more likely than more cédulas issuance. Away from the periphery, he said that a deal for Erste Bank Group could trigger more Austrian supply and that a second wave from France could also be forthcoming.

A covered bond analyst said that views differ on the ECB LTROs, with some seeing them as a source of cheap three year funding and others preferring issuance at “higher costs” to return to a sustainable business model.

“We argue that issuers doing good to come to market to get three year or longer dated market funding as one can assume that the ECB will also (or even particularly) for the three year LTRO take a look the collateral and their market prices during the three year period (and makes a daily mark-to-market anyway),” he said.