Spain’s Bankia priced a Eu500m two year cédulas hipotecarias yesterday (Wednesday), and an official at the issuer told The Covered Bond Report that the result was encouraging in showing there is “life after the LTRO” and downgrades it recently suffered.

Coming to the benchmark covered bond market for the first time since it was formed as a result of a merger of Spanish savings banks in December 2010, Bankia priced the transaction at 290bp over mid-swaps, in line with guidance, via leads Bank of America Merrill Lynch, Credit Suisse, Natixis and Nomura, alongside Bankia. The deal is the shortest dated euro benchmark covered bond of the year and came with the highest spread.

The benchmark is the fifth from a Spanish issuer in just over three weeks, although there was a two week lapse before Bankia was able to follow up on what was a quick succession of transactions from its peers earlier this month. That spate of deals began with a Eu2bn three year from Banco Santander on 1 February and was rounded off at the time by a Eu1bn five year CaixaBank issue on 8 February.

Fernando Cuesta, head of funding at Bankia, told The Covered Bond Report that a blackout period before the release of its annual results on 10 February prevented the issuer from joining its peers in coming to the market earlier this month, despite the market having been in good shape. Negative rating actions on Spanish banks and covered bonds the following week then undermined any issuance opportunity, he added.

“The week of the 13th the mood changed, with the rating agencies concluding reviews for downgrade of the Spanish financial system after action on the sovereign,” he said. “That week we could not consider a transaction with a question mark hanging over our ratings.”

Fitch on 13 February downgraded Bankia, from A- to BBB+, alongside Banco Bilbao Vizcaya Argentaria and CaixaBank after cutting the sovereign from AA- to A on 27 January, and Moody’s last Thursday (16 February) downgraded 17 standalone cédulas programmes as part of mass negative rating actions on European financial institutions and some of their debt instruments, also after cutting the sovereign. Moody’s now rates Bankia’s cédulas hipotecarias A2.

Cuesta said that the issuer also preferred to wait until Standard & Poor’s had carried out an impending rating action on Bankia’s cédulas hipotecarias, ultimately deciding to proceed with a transaction after S&P on Tuesday downgraded the bonds from AAA to AA.

“We reconsidered the deal with the lead managers, and the feedback from investors, including foreign accounts, was good,” he said.

With a split A2/AA rating Bankia’s issue is believed to be the lowest rated benchmark covered bond at launch.

Cuesta said that the level of demand from foreign investors, at just shy of 50%, is an encouraging sign given the transaction’s rating.

“It shows that investors are changing their minds, and taking a different perspective on ratings,” he said. “Most sovereigns are not rated triple-A, and if investors have cash to put to work they will think twice about where to invest.”

The leads built an orderbook of around Eu800m based on 80 orders, with Cuesta highlighting as “a nice surprise” a large order from a German account that had not participated in covered bonds in such size for some time.

“It was also good that we did not need much support from central banks,” he added.

Spanish accounts bought 51%, Germany 23%, the UK 15%, the Netherlands 4%, France 3%, Italy 2%, and others 2%. Fund managers were allocated 41%, banks 24%, central banks 11%, corporates 9%, insurance companies 9%, pension funds 4%, and others 2%.

Cuesta said that the issuer considered revising the pricing to 285bp over given the size of the orderbook, but decided against this because the 290bp over level was reasonable, coming flat to secondaries, and offered scope for performance.

“We considered increasing the deal because of the Eu800m orderbook,” he added, “but we preferred to allocate to real money investors instead of increasing the volume and challenging performance in secondaries.”

A syndicate official away from the leads saw the deal at around re-offer this (Thursday) morning, but said it was difficult to read much into this, while a lead syndicate official said the bonds had traded 20bp tighter this morning.

Cuesta highlighted as encouraging the level of demand despite the deal not settling in time for bank investors to be able to pledge it as collateral from the outset in the 36 month longer term repo operation (LTRO) being held by the European Central Bank next Wednesday, 29 February.

“The deal settles on the 29th but you need at least two to three days because you need to pledge assets and sign certain documents so it’s impossible for these assets to be placed directly in the LTRO,” said Cuesta.

However, he suggested that some investors could still use the deal as substitute collateral for the LTRO at a later stage.

“That could explain part of what is going on, and it’s good because it means there is life after the LTRO,” he said.