The new transactions were smoothly executed, tightened 6bp-8bp, with issuers happy to take greater size.

“Everything has still been around five years, which is a sweet-spot for investors,” said a syndicate banker involved in today’s supply. “Scarcity played in favour of the Canadian and Swedish projects, but even a relatively small, private equity-owned French name worked very well in this environment.

“So everything is working very well, nobody is overpaying, and they have access to size despite paying very little NIP. That should push people to look at the market.”

Another banker said the market has rediscovered its resilience very quickly.

“The tailwind just comes from the fact that the market has gotten to grips with most of the nonsense coming out of the White House, and they haven’t produced anything significantly new over the last couple of days, at least,” he said. “This allows new transactions to work again under what you could call the new normal.

“So let’s make use of this period of relative calmness. This, I think, is how many potential issuers may be looking at things – you don’t know when the next round of madness is going to be triggered.”

Indeed, further benchmark supply is deemed possible tomorrow (Wednesday) ahead of 1 May public holidays across Europe. However, only a mandate for a sub-benchmark covered bond had been officially announced today: Oberösterreichische Landesbank (HYPO Oberösterreich) is set to launch a €250m no-grow short seven year (March 2032) mortgage Pfandbrief via Danske, Erste, LBBW and Helaba.

Skandinaviska Enskilda Banken(SEB) leads Commerzbank, Crédit Agricole, ING, Natixis and SEB opened books this morning with guidance of the mid-swaps plus 38bp area for a euro benchmark-sized May 2030 covered bond, expected rating Aaa. After around an hour, the leads reported books above €1.75bn, including €75m of joint lead manager interest, and after around two hours and 10 minutes, they set the spread at 32bp and the size at €1bn (Skr11bn) on the back of books above €2bn. The final book was above €1.8bn, including the €75m of JLM interest.

“There has been a fair bit out of the Nordics,” said a syndicate banker at one of the leads, “but there’s been limited supply out of Sweden and nothing from SEB since 2023, meaning there were unused lines for the name.”

SEB’s last euro benchmark was a €1.5bn long five year in February 2023.

“There could have been a bit of an impact from the CIBC on the SEB, because, after all, it was 10bp cheaper for something that is not too far from SEB,” added the lead banker, “but we were testing the low 30s, which is as tight as things came pre-tariffs, and still had extremely strong execution.”

He noted that the spread was inside a €1bn 5.25 year printed by OP Mortgage Bank, at 33bp, on 2 April, before “Liberation Day”, while close to the 30bp level achieved by DNB Boligkreditt with a €1.5bn 4.5 year on 20 March. Pre-announcement comparables circulated by the leads put the Norwegian paper was at 31bp, while SCBC February 2030s – printed at 34bp on 17 February – and LF Hypotek March 2030s issued last year were at 32bp, implying a new issue premium of up to 1bp, according to syndicate bankers at and away from the leads.

“When you put everything together,” added the lead banker, “the issuer didn’t pay one more bip than what they would have if they had done the trade earlier. And the quality of the order book and convincing outcome are a testament to the SEB name.”

Canadian Imperial Bank of Commerce (CIBC) leads CIBC, Commerzbank, DZ, HSBC, ING and Natixis opened books with guidance of the 48bp area for a euro benchmark-sized May 2030 covered bond, expected ratings Aaa/AAA (Moody’s/Fitch). After around an hour and a quarter, they reported books above €2bn, including €125m of JLM interest, and after around two-and-a-half hours, the spread was set at 41bp and the size at €1.25bn (C$1.97bn) on the back of books above €3bn.

“If you look at how the deal developed and how it ended, it was a very successful transaction,” said a syndicate banker at one of the leads. “Moving 7bp from start to finish, with no intermediate step, the €1.25bn size – which I understand was the maximum they could do – and they got the tightest possible price, with zero concession.”

The leads put fair value at 41bp based on the secondary levels of CIBC’s last euro benchmark, a €1.25bn five year issued in September 2024, and the last Canadian euro benchmark, a €1.5bn five year issued by Royal Bank of Canada at 40bp in January.

After a mandate announcement yesterday (Monday), CCF SFH leads Crédit Agricole, Helaba, Natixis, SG and UniCredit went out with guidance of the 63bp area for an expected €500m six year covered bond, expected rating Aaa. After around an hour and 25 minutes, the leads reported books above €1.5bn, including €175m of JLM interest, and after around two-and-a-half hours, the spread was set at 56bp and the size at €750m on the back of books above €2bn, including €200m of JLM interest. The final book was above €1.7bn.

A lead banker said that, with pricing coming in around fair value, CCF took more size than expected.

“French covered bond spreads are still relatively elevated,” he added. “It’s quite telling that Iccrea yesterday achieved a better price than CCF.”

The Italian bank yesterday issued the first euro benchmark covered bond in almost two weeks, since a €1.25bn long five year for BPCE SFH on 15 April.

Iccrea leads Barclays, BBVA, Crédit Agricole, Helaba, UBS and UniCredit priced the €600m 5.5 year OBG, expected rating Aa3, at 52bp, following guidance of the 60bp area. The deal was upsized from €500m on the back of a peak book above €1.8bn and final book of around €1.15bn.

A lead banker putting the NIP at 2bp, while the pricing was some 9bp inside BTPs.

Crédit Agricole Italia and Landesbank Baden-Württemberg (LBBW) reopened the primary market with the first euro benchmarks since November on Wednesday, followed by deals from NordLB yesterday (Thursday) and Caffil today – the French issuer having concluded 2024 supply on 25 November.

The first full week of January is usually the busiest week of the year, but – on top of Monday being a public holiday in many parts of Europe – factors that had been cited as dampeners going into year-end indeed combined to subdue issuance.

“There was a consensus – perhaps to a damaging extent – that covereds were going to be sidelined at the start, given that seniors are so attractive and covereds don’t appear to have found their home yet amid the SSA widening,” said a syndicate banker. “So covered bonds were caught between a rock and a hard place, and didn’t know where to go.

“This translated into an extremely slim turnout.”

The €4.25bn total this week compares with €13.25bn of euro benchmark issuance in the 1-5 January week of 2024, with €3.75bn of that having been sold on 2 January alone. Covered bond supply this week was also overshadowed by unsecured bank issuance.

Those issuers who did opt for covered bonds this week found ample demand, after the first two both adopted pricing strategies that took into account the prevailing dynamics and recent lack of supply.

Credit Agricole Italia (pictured) achieved the biggest book of the week when it attracted a peak €7bn-plus of orders to a €1bn nine year OBG. Leads BBVA, Crédit Agricole, LBBW, Mediobanca, Natixis, RBI and UniCredit tightened pricing from IPTs of 100bp-105bp over mid-swaps to guidance of 90bp+/-2bp, ultimately pricing the February 2034 benchmark at 88bp on the back of a final €6.4bn-plus book.

“It was a proposition that was very difficult to miss,” said a syndicate banker at one of the leads, “especially for those credit portfolio managers that are happy to look at both covered and seniors and play the relative value between asset classes and geographies – Crédit Agricole Italia came with triple-digit IPTs when on the same day you had a trade like DNB starting at the 95bp area for a senior preferred.”

The Norwegian trade was a €750m six year non-call five green bond tightened to 70bp.

With there having been little long-dated euro benchmark issuance for some time, let alone long-dated OBG issuance, Crédit Agricole Italia’s leads did not declare a new issue premium, but a banker suggested it offered a pick-up in the high single-digits over outstandings. The pricing was 16bp inside BTPs.

A €1bn five year mortgage Pfandbrief from LBBW on the same day was a more typical new year reopener and enjoyed a strong reception, attracting some €5.7bn of demand. Leads DZ, Erste, LBBW, Rabobank and TD went straight out with will-price-in-range guidance of 40bp-42bp and achieved the tighter end, although the new issue premium was put at around 7bp.

“They played it super-safe by limiting themselves to a 2bp move in choosing this pricing approach, because their overriding ambition was to get the €1bn securely under their belt,” said a syndicate banker. “As they have plenty to do, I don’t blame them for that and it was the right tactics, but I think with hindsight it wasn’t necessary.”

Yesterday, NordLB followed up with a €1bn 3.75 year green mortgage Pfandbrief that attracted some €5bn or demand. Leads DZ, Helaba, Natixis, NordLB, RBC and Santander adopted a more common approach to pricing and tightened from the mid-swaps plus 38bp area to 33bp, equivalent to a new issue premium of around 3bp.

Caffil then launched the biggest euro covered bond of the week today (Friday), a €1.25bn 8.5 year via Barclays, Crédit Agricole, JP Morgan, LBBW and Natixis. The new issue attracted some €5.25bn of demand, allowing pricing to be tightened from the mid-swaps plus 78bp area to 69bp.

“It’s a super-strong trade,” said a syndicate banker at one of the leads. “The main milestone here for Caffil is that they are pricing inside OATs – we started with IPTs just marginally back of OATs on an interpolated basis, and priced it inside.”

He added that the pricing reflected zero new issue premium.

A syndicate banker remarked that the strength of demand for Caffil’s and NordLB’s trades was at the high end of their previous achievements.

“Books seem surprisingly big at the moment,” he said. “Where is this demand coming from? Maybe it is partly due to the fact that supply is so scarce, so those investors who want to buy covered bonds believe that there won’t be much around the corner so they should get what they can – if they had had heard that there was €15bn per week to come, they probably wouldn’t have rushed in so aggressively.

“Bearing in mind that an avalanche is still not expected, this is good news for issuers, because it seems to provide for fertile ground when it comes to grinding spreads tighter. Let’s see what happens, because we are aware of some issuers looking at hitting what appears to be such a receptive market.”

DNB Boligkreditt entered the market this morning via Barclays, BBVA, Crédit Agricole, DNB, ING, NatWest and NordLB, with initial guidance of the mid-swaps plus 31bp area for a euro benchmark-sized June 2031 issue, expected ratings Aaa/AAA (Moody’s/S&P). After around two hours and 10 minutes, the leads reported books above €1.5bn, including €275m of JLM interest, then after close to three hours, the size and spread were set at €1bn and 25bp on the back of books above €1.5bn. The final order book was €1.1bn, including €175m of JLM interest.

“This was a bit of a surprise to the downside,” said a syndicate banker away from the leads. “We have not experienced something like this for some, the market as a whole and in particular DNB, which usually provides us with great transactions, large books, large deals, etc.

“The pricing was punchy, but still…”

A syndicate banker at one of the leads acknowledged that there had been significant book attrition at the re-offer spread.

“The moral here is that we can now see quite a lot of selectivity from investors, especially when it comes to these low beta type of names,” he said. “We have seen an almost uninterrupted rally since autumn with just some volatility here and there, and it doesn’t feel as if the market is going any tighter than this – I don’t expect we’ll beat this kind of level anytime soon.

“There is less investor liquidity,” he added, “especially for names like DNB where levels are as compressed as we can see today – they are much more willing to look at something exotic, as we saw on Iccrea.”

Another syndicate banker away from the leads said this was particularly the case at the longer end, where there was more investor selling in the secondary market, particularly from “tourists” who had opportunistically bought into the asset class. And he said that if low beta issuers are looking for size, they need to pay a couple of basis points more today, something the lead banker echoed.

According to pre-announcement comparables circulated by the leads, DNB March 2029s were quoted at 20bp, mid, with Rabobank February 2034s at 27bp and Nordea Mortgage Bank January 2031s at 25bp, and he put fair value at around 24bp, implying a new issue premium of 1bp.

“CFF paid maybe 3bp of new issue premium on Tuesday,” added the lead banker, “and that got done relatively easily for a big size.”

Danske Bank announced the mandate for its dual-tranche, three year floating and seven year fixed rate issuance, expected ratings AAA/AAA (S&P/Fitch) yesterday, mandating DZ, Erste, Natixis, Santander and UBS alongside itself.

The euro benchmark is the first from the Danish entity since 2017 and the first ever from the issuer’s “D” pool. This includes solely Danish residential mortgages and has only previously been used for Danish krone issuance and private placements – other Danske issuance has been backed by cover pools of international mortgages and a mix of residential and commercial mortgages. The euro benchmark is also understood to be the first from Denmark to feature solely residential mortgages, with Jyske and Nykredit issuance having included some a mix including commercial mortgages.

“This is the purest of the pure,” said a lead banker. “And arguably Denmark is the most solid of the Nordics these days, in terms of the economy and mortgage market.”

The leads opened books this morning with guidance of the three month Euribor plus 32bp area for the June 2027 FRN and mid-swaps plus 35bp area for the June 2031 fixed rate benchmark. After around an hour, they reported combined books above €2bn, including €410m of JLM interest. Then after around two hours and 50 minutes, with combined books above €2.8bn (of which €410m was JLM interest), the spread for the three year was set at 18bp on the back of books above €1.15bn (€235m of JLM interest), and for the seven year at 27bp on the back of books above €1.65bn (€175m), with the combined issue size given as €1bn-€1.25bn. The combined book at re-offer was €2.25bn, and the three year tranche was sized at €500m on the back of orders above €950m, and the seven year at €750m on the back of books above €1.3bn, JLM interest unchanged.

“We achieved exactly the result we were hoping for,” said the lead banker.

He said the now common fixed and floating pairing had achieved the desired outcome of offering both attractive size and price, with the seven year result particularly pleasing in the context of DNB’s issuance and having been helped by the premarketing yesterday.

According to pre-announcement comparables circulated by the leads yesterday, Nordea January 2027s were at a discount margin of 11bp, mid, Nationwide May 2027s at 15bp, and Santander UK May 2027s at 17bp. LF Hypotek May 2030s were at 25.5bp, mid, Nordea January 2031s at 24.5bp, and Jyske April 2031s at 27.5bp. The lead banker put fair value for the seven year in the context of the 27bp area, taking into account the historic pick-up paid by Danske, even if this was being eroded.

After a mandate announcement yesterday, Iccrea Banca leads Barclays, Crédit Agricole, DZ, Santander and UniCredit opened books this morning with guidance of the mid-swaps plus 78bp area for the €500m-expected June 2034 OBG, expected rating Aa3. After around an hour and 20 minutes, they reported books above €1.5bn, including €180m of JLM interest, then after around two-and-a-half hours, the spread was set at 68bp on the back of books above €2bn, including €200m of JLM interest, with a size of €500m still expected. After around three hours and 10 minutes, the deal was ultimately sized at €750m on the back of books above €1.85bn, pre-reconciliation and including €200m of JLM interest. The final book was above €1.45bn.

“The pricing inside 70bp was something that they were definitely targeting,” said a syndicate banker at one of the leads, “and luckily we were able to safeguard most of the book after fixing at 68bp, so we could go for both price and size, being in a position to do €750m.”

He put fair value in the context of the high 60s, based on a varied mix of comparables.

“We didn’t officially go out with a number,” add the lead banker, “but the re-offer was close to, if not slightly through fair value.”

After the announcement of a €500m no-grow three year debut covered bond on Friday and investor calls on Monday and yesterday, Maybank Singapore joint leads BNP Paribas, DBS, Deutsche, Helaba, HSBC and Maybank Securities opened books with guidance of the mid-swaps plus 32bp area for the June 2027 new issue, expected ratings Aaa/AAA (Moody’s/S&P). After around an hour and 10 minutes, they reported books above €1.1bn, including €250m of JLM interest, then after around two-and-a-half hours, guidance was revised to 26bp+/-1bp, will price in range, on the back of books above €1.4bn. After around three-and-a-half hours, the spread was ultimately set at 25bp, on the back of books above €1.37bn, including €150m of JLM interest, and the final book good at re-offer was €1.25bn.

Maybank’s programme was established two months ago, with Standard Chartered Singapore subsequently doing likewise and then launching its debut on Tuesday of last week (21 May), a €500m three year covered bond priced at mid-swaps plus 22bp.

Following a mandate announcement yesterday (Tuesday), Banco BPM leads Banca Akros, Barclays, BBVA, Crédit Agricole, LBBW, RBI and UniCredit opened books this morning with guidance of the mid-swaps plus 83bp area for a euro benchmark-sized January 2030 OBG, expected rating Aa3. After around two-and-three-quarter hours they set the spread at 77bp and the size at €750m on the back of books above €1.4bn, including €70m of joint lead manager interest.

A lead banker said the book and pricing represented a strong result for the issuer, particularly given more challenging market conditions.

“Today was quite a soft one,” he said. “Asian equities were down 4% this morning and everything was red, and was still quite shaky through the day. But we are talking about around 5bp of new issue concession, which is bang in the middle of what OBGs have been paying, and the €1.4bn book is comparable with Mediobanca and higher than Sondrio.

“We took the softness into account and adjusted the IPTs slightly versus what we had initially considered, but after the 6bp tightening we in the end tightened to what we had originally hoped to achieve. Overall, it was a very nicely done trade.”

The issuer’s 3.75% June 2028s were seen at 68bp, among pre-announcement comparables circulated by the leads, Credem social 3.25% April 2029s, issued last week, at 64bp, UniCredit 3.50% July 2030s at 69bp, and Crédit Agricole Italia 3.50% January 2030s at 72bp (all Aa3). BTPs were at 73bp-74bp in that part of the curve.

BPM’s issue comes after Banca Popolare di Sondrio issued a €500m five-and-a-half year OBG on Monday, after a mandate announcement on Friday. Leads IMI Intesa Sanpaolo, LBBW, RBI, Santander, SG and UniCredit priced the July 2029 deal, expected rating AA (Fitch), at 77bp on the back of books above €950m, including €110m of JLM interest, after having gone out with initial guidance of the 80bp area.

According to pre-announcement comparables circulated on Friday, the issuer’s October 2028s were seen at 77bp, mid, with BPER Banca October 2028s at 72bp, BPM’s June 2028s at 68bp (as above), and Credem’s social April 2029s at 63bp (all Aa3). Some analysts deemed the new issue concession negligible, with one analyst further noting that the re-offer spread was inside the 81bp paid by Banco Popolare di Sondrio on a straight five year in October.

A syndicate banker away from the leads put the new issue premium closer to 3bp, with initial guidance 6bp back from fair value. He said this relatively aggressive approach probably contributed to the sub-€1bn book, but that the deal was nevertheless comfortably oversubscribed and had fared well in the secondary market. He further noted that secondary spreads had in the past fortnight converged with the levels of new issuance, contributing to the diminishment of new issue premiums.

The two Italian deals take year-to-date OBG supply to five new issues totalling €3bn, with national champions Intesa Sanpaolo and UniCredit yet to tap the market.

“Now it’s time to see if the Italian success can be replicated for Cajamar,” said a syndicate banker.

Cajamar Caja Rural has mandated what is set to be the first Spanish benchmark covered bond of the year, having mandated a five-and-a-half year cédulas hipotecarias trade to BBVA, Crédit Agricole, Deutsche, Nomura and Santander.

According to pre-announcement comparables, Cajamar 3.375% February 2028s were seen at 61bp, mid, Caja Rural de Navarra 0.75% February 2029s at 50bp, Sabadell 1.75% May 2029s at 63bp, Abanca 0.75% May 2029s at 45bp, and UniCaja 0.25% September 2029s at 60bp, while 3.5% May 2029 Bonos were at 22bp.

Cajamar’s last euro benchmark was a €750m five year in February 2023. The last euro benchmark covered bond from Spain was a €500m three year for Deutsche Bank Español on 14 November, priced at mid-swaps plus 40bp.

Following a mandate announcement on Tuesday, Crédit Agricole Italia leads Crédit Agricole, IMI Intesa Sanpaolo, Natixis, RBI, Santander and UniCredit opened books with initial price thoughts of 105bp-110bp over mid-swaps for a €500m no-grow July 2033 green OBG, expected rating Aa3. After around an hour and 10 minutes, they reported books above €2bn, and after less than two hours they set the spread at 90bp on the back of more than €3.5bn of demand, with the final book reaching some €4.5bn, with almost 200 accounts involved and some 180 of them allocated bonds.

“Almost all covered bonds have been going well,” said a syndicate banker away from the leads, “but this was something else!”

“A covered bond with a triple-digit starting level seems to have been enough to set the world on fire.”

A syndicate banker at one of the leads said the initial price thoughts were just one factor in the deal’s reception.

“The combination of WNG [will not grow] and green for a covered bond usually acts like vitamin C,” he said. “You add the three-digit component, and it felt like a riot.

“Almost 200 lines in a covered bond order book – I don’t remember the last time it happened.”

He said the one-and-a-half day process and price discovery had been important factors in the deal’s success. A wide range of feedback received, with indications of interest anywhere between 85bp and 110bp, according to the lead banker.

Some market participants away from the leads put the new issue premium as low as zero, although there was no firm consensus. The lead banker put it in the context of the very low mid-single digits.

As well as secondary levels for OBGs and BTPs, senior preferred bonds of Crédit Agricole SA, rated Aa3/A+/A+ (Moody’s/S&P/Fitch) were included in pre-announcement comparables circulated by the leads, with the bank’s January 2033s and November 2034s quoted at 97bp and 93bp, mid, respectively. CAI January 2032 and March 33 OBGs were seen at 79bp and 81bp, and its January 2038s at 92bp.

“Given the particular spread complex in the asset class,” said the lead banker, “the deal attracted a lot of credit buyers that we normally see in the lower part of the capital structure.

“The participation of UK buyers was amazing and the quality of the order book stunning,” he added. “The allocation process was painful and we had to zero many momentum buyers in order to favour green funds and early-birds.”

December 2029 and May 2033 BTPs were seen at 82bp and 112bp, respectively, and the final pricing was put at some 20bp through the sovereign.

“International accounts play the relative value game across European names and jurisdictions and ignore BTP valuations, but domestic accounts don’t and struggle to buy inside the sovereign,” said the lead banker. “It was important to strike the right balance and to maximise the audience at the start.

“The deal solidifies the strong momentum overserved in the asset class since the beginning of the year,” he added. “Pricing 20bp inside the sovereign curve is not something you could take for granted in the post-QE era. The distortion is indeed still elevated in the secondary market and people still have to digest the heavy legacy left by the ECB and CBPP3.”

The new issue is the longest-dated Italian euro benchmark in almost two years, with CAI having sold a €1bn 10 and €500m 20 year tranches on 12 January 2022.

On Tuesday, BPER Banca leads Crédit Agricole, IMI Intesa Sanpaolo, NordLB, RBI, UBS and UniCredit opened books for the euro benchmark-sized October 2028 OBG, expected rating Aa3, with guidance of the mid-swaps plus 80bp area. After around 50 minutes, they reported books above €1bn, including €165m of joint lead manager interest, and after around an hour and three-quarters, they set the size at €750m and the spread at 75bp on the back of books above €1.5bn, with the final book good at re-offer above €1.6bn, including €180m of JLM interest. A lead banker put the new issue premium at around 6bp.

The execution was much stronger than that of the last Italian euro benchmark, a €500m four year OBG from Iccrea on 31 October, which was priced in the middle of guidance of the 75bp area on the back of a final book of some €720m.

BPER moved after Moody’s had on Thursday of last week (17 November) changed the outlook on the Italian sovereign’s Baa3 rating from negative to stable.

“The sword of Damocles was not there anymore for Italy,” said the lead banker, “and that really helped in terms of the performance of BTPs versus mid-swaps and other govvies, in turn making covered bonds out of Italy more juicy for investors such as asset managers.

“BPER’s also one of the small, but strong names out of Italy, and unlike some of their peers, they hadn’t done a trade yet this year, so a lot of investors were aware that this was going to come at some point and were keeping a little powder dry for when BPER would come.”

The new euro benchmark is BPER’s first since a €600m seven year in March 2019, which is its only other outstanding euro benchmark.

BPER’s long term Baa2 deposit and Ba1 issuer and senior unsecured ratings were affirmed by Moody’s later on Tuesday amid a slew of Italian rating actions, with the outlook on its deposit and senior ratings changed to positive.

While BPER’s result was reminiscent of the success of most OBGs in the pre-summer return of OBGs, Wüstenrot Bausparkasse’s outcome, also on Tuesday, suggested that the periodic travails of the Pfandbrief market might not have been overcome. However, market participants emphasised a split between investor receptiveness to “household” and less well followed names as key to the disappointing demand.

Leads Commerzbank, Deutsche, DZ, Helaba and UniCredit attracted just €435m of non-JLM demand to the German issuer’s €500m no-grow November 2028 inaugural green Pfandbrief, with pricing in the middle of guidance of the 32bp area, equivalent to a new issue premium of around 10bp.

“The difficulty here was that it’s not the easiest name,” said a banker away from the leads, “and the investor base is quite small – clearly you’re just talking to German accounts, and they haven’t been the most active of late in covered and the dynamic in Pfandbriefe hasn’t been that good. So I don’t think it was an issue of price; it’s just something that wasn’t very appealing to investors at this time of year.

“It’s also quite interesting,” he added, “because some issuers have been using green or labelled covered as a way to de-risk a trade a little, but we see here that it’s not the solution to everything.”

A lead banker said the outcome, although well short of desired, was “bearable”, and was encouraged by those investors who had placed orders remaining in the book even when it was clear the deal was not subscribed.

“It’s a question of the market having matured,” he added, “so people know this can happen, and those who are willing to get their head around the name and its quality are happy to have the concession left on the table, without that necessarily being dependent on how many other people are thinking the same way.

“This was probably something that kept the deal afloat.”

Expectations of further euro benchmark issuance in the coming week were low, with several syndicate bankers saying they were not aware of any concrete plans or signs of issuers eyeing the market, despite BPER and Nationwide having shown that successful issues have still been possible.

“There may be one or two who have something hidden up their sleeves,” said one, “but we have nothing and I would be greatly surprised if we were to end up with any sort of transaction next week. Our clients are done for the year and are designing issuance strategies for 2024.”

Markus Herrmann, senior investment analyst at LBBW, suggested any further activity could reflect the trend purportedly borne out this week.

“For established ‘first tier’ benchmark issuers, it may be the right decision to go to market before the end of this year so as to avoid the usual crowding in January next year,” he said. “For other potential issuers, the example of Wüstenrot may be an indication that conditions might be better in the new year. For example, lines with investors will then be free again for second or third tier issuers, too, and the allocation options under new planning will be again more flexible.”

After a mandate announcement yesterday (Monday), leads ABN Amro, Barclays, Citi, Commerzbank and UniCredit opened books this morning with guidance of the mid-swaps plus 75bp area for the euro benchmark-sized November 2027 OBG, expected rating Aa3. Around three hours later, they set the final terms at a size of €500m at a spread of 75bp on the back of books above €500m, excluding joint lead manager interest, and the final book is understood to have reached some €720m.

A syndicate banker away from the leads said he was surprised that the deal did not gain sufficient traction to enable tightening from “very attractive” initial price thoughts – he saw the new issue premium at 10bp-15bp, while the leads circulated pre-announcement comparables including Iccrea 0.01% September 2028s at a z-spread of 63bp and 3.875% January 2029s at 68bp, with Banco BPM 3.875% September 2026s and 3.75% June 2023s were seen at 48bp and 63bp, respectively.

“The benchmark sizing language will have made a difference and potentially have scared some investors away,” suggested the syndicate banker. “In this market there is a different price for €500m – which the smaller Italians have tended to come with – and €750m.

“It’s quite telling that the final book was €720m – it points to quite a lot of posturing from investors, keeping their cards close to their chests – as they have typically done lately, making execution challenging – only to jump on the train once the final terms are set.”

He also cited the 81bp spread of the most recent OBG benchmark, a €500m five year deal for Banca Popolare di Sondrio two weeks ago (17 October), as something investors could point at as a reason not to go for a tighter spread on Iccrea’s shorter-dated offering.

Another banker away from the leads said the outcome reaffirmed investors’ recent preference for top tier names, ideally from core jurisdictions, even if some second tier Italian names had enjoyed success against variable backdrops earlier in the year.

“It wasn’t the easiest one,” he said. “If you look at recent covered bonds that worked really nicely, they are from national champions or at least household names. Italy is still a jurisdiction where there is a split between UniCredit, Intesa and then some of the smaller banks that at times have struggled.”

Today’s new issue comes after Iccrea sold its €500m September 2029s in early July.

A pick-up in euro benchmark covered bond supply is not anticipated until at least next week, with public holidays in some parts of Europe disrupting this week’s schedule and the outcome of the latest FOMC meeting tomorrow (Wednesday) among several data points further stymieing activity.

“Right now the pipeline is fairly limited,” said a banker. “But on the other hand, it is building up for next week in covered and senior, especially after the successful senior non-preferred trades for SEB yesterday and BFCM today.

“Credit is doing well,” he added. “Covered are solid, but trickier, and whether those in the pipeline will pull the trigger is another question.”

Today’s issuance of obbligazioni bancarie garantite (OBGs) is the first since June 2022 and first Italian benchmark to qualify as European Covered Bond (Premium). It comes after the Bank of Italy in late March finalised implementation of the EU covered bond directive. Banks had to then comply with the new framework, updating programmes, and give the central bank 30 days’ notice of their intention to issue.

The new covered bond is also UniCredit’s first OBG benchmark since 2016. After publication of its prospectus last month, it teed up the market reopener with a mandate announcement yesterday (Monday), confirming expectations that the Italian market would be reopened by a national champion.

This morning, leads BBVA, Commerzbank, Crédit Agricole, Erste, IMI-Intesa Sanpaolo, Natixis, Santander and UniCredit opened books for benchmark-sized January 2027 and July 2030 soft bullet issues, expected ratings Aa3, with initial guidance of the mid-swaps plus 35bp area and 65bp area, respectively. The long three and long seven year tranches were ultimately priced at 27bp and 57bp on the back of books of around €2.7bn and €2.1bn, for an aggregate €4.8bn book including around 200 accounts.

Syndicate bankers noted that the large pricing moves from start to finish reflected both the necessity of price discovery and strong level of demand, but also a desire to ensure a successful reopening of the market.

“They moved 8bp from start to finish,” said a banker away from the leads, “which reflects firstly, the demand, and secondly, that they played it safe with a rather generous pricing strategy. Of course, it’s the opening of the new Italian segment, so you’d rather make sure that it’s successful – if it had flopped, no one would have given them any plaudits for being first.

“But tightening 8bp and still being able to get €3bn in this market is no small feat.”

A lead banker said that, absent any recent, liquid Italian benchmarks to use as comparables, Santander cédulas were widely used as a starting point for pricing considerations. He suggested a new long three year Santander benchmark in the same maturity would be priced in the low 20s, and that a similar level for UniCredit would be not unreasonable, particularly with demand for the shorter piece expected to be stronger and hence less price sensitive.

“We were confident anything in the mid-20s would go well,” he said. “We could perhaps have started a little tighter – but that’s easy to say with the benefit of hindsight.

“It should perform in the secondary market given the strong demand,” he added.

Santander’s curve implied 30bp between the shorter and longer maturities, according to the lead banker, and the leads stuck with this differential for both starting and landing levels. The re-offer spreads put the long three year at around 1.5bp over the Italian sovereign and the long seven year at around 28bp through BTPs.

A banker away from the leads said the pricing also roughly made sense versus what Italian references are available, noting that old UniCredit October 2026s were seen at around 25bp, while Crédit Agricole Italia January 2026s were quoted around 32bp over and September 2031s at 46bp.

According to an issuer presentation for its comeback issue, UniCredit has included covered bond and securitisation issuance out of Italy of €3bn for its 2023 funding plan, implying that it has completed OBG issuance for the year – barring any pre-funding for 2024.

Crédit Agricole Italia is expected to launch a rapid follow-up tomorrow (Wednesday), following the announcement today of plans for a long six year (January 2030) issue via ABN Amro, Crédit Agricole, IMI Intesa Sanpaolo, RBI and UniCredit.

Please see our recent Southern European Covered Bond Roundtable for further context.

Casper Andersen, senior director and covered bond sector lead, S&P Global
Ghazi El-Salmi, NORD/LB DCM Origination
Miguel García de Eulate, head of treasury and capital markets, Caja Rural de Navarra (CRN)
Frederik Kunze, NORD/LB Floor Research
Paolo Labbozzetta, head of group funding, Mediobanca
Stefano Marlat, head of finance, Crédit Agricole Italia
Niels Platz Bertelsen, fixed income analyst, Nordea Asset Management
Neil Day, managing editor, The Covered Bond Report, and moderator

Click here to download a pdf version of this roundtable.

Neil Day, The Covered Bond Report: After unprecedented levels of euro benchmark issuance last year, we have seen records fall in the first quarter. There’s been a change in the rates environment and disruption from Silicon Valley Bank and Credit Suisse, but, come what may, the market has proven resilient. What’s behind these dynamics?

Frederik Kunze, NORD/LB: We have seen quite a few episodes of market turbulence in recent years, but covered bonds have proven to be a crisis-proof funding instrument. And while, thanks to TLTRO III, covered bonds were not a public funding tool during Covid-19, in the last two crises — the attack on Ukraine and the recent bank stress — covered bonds were used for public issuance. Particularly in times of uncertainty, for issuers and investors alike, covered bonds represent a kind of rock they can cling to when volatility is high. Meanwhile, from an investor perspective spreads and in particular yields have become much more interesting and the asset class is much more attractive on a relative value basis. With the ECB leaving, there has been scope for spreads to widen, but performance has been quite robust, while real money investors have been coming back. Hence, the market has been working well and it is not surprising to see many jurisdictions coming back to the primary market and using the funding tool. To sum up, many investors see valuable and suitable investment opportunities in the covered bond universe. Overall, particularly taking into account the overall environment, we have had a very strong start to the year in the first quarter and with a lot of issuance following in April.

Casper Andersen, S&P: Covered bond issuance is rife across the market. We’ve seen interesting issuances from Spain, for example, with volumes that we haven’t seen since 2016. Clearly a lot of progress has been made on the harmonisation front, with the legislative underpinnings coming into sync, which has supported issuance from many jurisdictions and is hopefully also bringing investors some comfort. We are also seeing the end of the TLTROs, with banks considering how best to repay or refinance. On the other hand, up to recently, deposits have proven sticky in Europe, which may lower or increase the need for covered bond funding for  banks depending on their circumstances. So with the ECB set to play a smaller role in funding European banks, the question is, what is the optimal funding mix going forward? It will be interesting to see how that plays out, but what we’ve seen so far is that covered bonds definitely have an important role to play. As Frederik noted, they are also becoming an attractive target for investors again, after many years during which investor interest was lower.

We are also getting more questions about credit quality than we had for a long time. We actually think that European banks’ asset quality should deteriorate only moderately this year. Even if we do expect house prices in a lot of the countries we follow to be very sluggish and probably falling, even on a nominal basis, we still believe that the strong employment throughout Europe will generally support mortgage performance. SME performance may cause some market disruption and credit performance could be an issue for some countries, but SMEs are less relevant for Italy when it comes to covered bonds. There could also be some sovereign headline risk more generally and particularly when we’re talking about southern Europe, sovereign performance comes into play, too. That’s something investors are following closely, as are we are, of course, because the performance of the respective sovereign can impact our covered bond ratings. We believe that could impact how easy or difficult it will be for southern European covered bond issuers to fund in the near future.

Niels Platz Bertelsen, Nordea Asset Management: We have been quite bullish on covered bonds. They looked quite attractive during the whole of 2022, and even got increasingly attractive versus government bonds as the year progressed, given the significant widening of asset swap spreads. At the start of the year, we also saw unsecured debt as rather tight versus covered bonds. So we saw covered bonds as the place to be going into 2023.

That said, I have been quite surprised about the high level of issuance this year. We expected issuance to be front-loaded due to the ECB stepping out and the refinancing of TLTROs, but we had not expected this amount of issuance. We nevertheless see the net supply picture in 2023 as being much more favourable for covered bonds than government bonds, as we expect a flood of government bonds, and the EU will also have to do a lot of issuance this year. As I said, we also see issuers having front-loaded some of their funding plans in covered bonds and with a frozen housing market in most of the Western world, not much new mortgage production is happening. That — together with rather sticky deposits — can impact issuance negatively for the rest of the year. So on a relative value basis, we still see covered bonds as quite attractive looking forward.

Day, The CBR: Did you reshuffle your positions at all in light of the market developments we’ve seen this year, such as the bank problems?

Platz Bertelsen, Nordea AM: Not really. We got a lot of basic questions on covered bonds from our clients, on aspects like the structure and bail-in treatment. So some of the fears around the banking sector were also seen on covered bonds. But I think it showed the strength of covered bonds — there was rather limited volatility in the covered bond market during March. I just saw it as a buying opportunity — one issuer in particular was suddenly trading quite attractively in the covered bond space.

Ghazi El-Salmi, NORD/LB: Expanding on the point Frederik made earlier, higher re-offer yields and higher spreads are of course definitely attracting investors back, which was much-needed in an environment where the ECB was stepping out of the market. The main difference between now and the latter part of last year — when we already had higher spreads and rates, too — is that last year, we had all that volatility, especially in August and September, with a massive rise in swap rates, which scared away some investors or led them to place smaller orders. In the first quarter of this year, we still have an environment with higher spreads and rates, but now we have much less volatility and a new equilibrium that a lot of investors are comfortable with. This interest is reflected in order books — many investors have returned, while others who had remained loyal to the product are comfortable placing higher orders again — and that higher demand has enabled the high issuance volumes.

Day, The CBR: How have southern European issuers fared? We’ve already seen a pick-up in activity from Spain, and the first Portuguese deal since 2019 yesterday.

El-Salmi, NORD/LB: We’ve seen seven Spanish covered bonds this year, so these are probably the best proxy for southern European demand in general. They have outperformed the rest of the market, in both primary and secondary. On average, cédulas tightened almost 6bp from re-offer in the secondary market, for example. They were all — without exception — very successful in the primary market, too. Spanish deals paid on average 6bp of new issue premium — slightly more than the overall average of 4bp — and in return they achieved more dynamic bookbuilding, with 5.7bp of tightening from guidance to re-offer versus 3.7bp for the overall market, and higher bid to cover ratios, 2.7x compared to 2.2x. So while southern European covered bonds might in the past have been a bit behind in convincing investors to place orders, now they are one of the most in-demand products. That is encouraging, not only for Spain, but the other jurisdictions, too — as you mentioned, we have just seen Santander Totta issue their first bond since 2017, so quite a comeback — and then the Italian covered bonds that are still to follow.

Day, The CBR: We will find out more about Italy shortly. But let’s start with the Spanish issuance we have already seen this year. Miguel, did your experience correspond with the positives Ghazi described?

Miguel García de Eulate, Caja Rural de Navarra: We can offer a good point of comparison, in the sense that we issued in February 2022 and then in January 2023, and the environment is totally different. Last year, rates volatility had already begun, we were in the pre-war phase, and bookbuilding was much more complicated, whereas this year we got much more demand against a more stable backdrop for rates.

Also from the credit perspective, there is the view that the periphery and in particular the Spanish economy is not going to be the problem child of Europe anymore, at least not this time around. Look at the leverage of the private sector, the health of the financial sector, unemployment, house prices or many other metrics — from a credit perspective, the cédulas market is very strong and that will remain the case. It’s true that we’ve had much more Spanish issuance this year, but it is still not huge — we are talking about €7bn-€8bn — and at this pace, we will still see flat or negative net supply for the year. This is very much related to the deleveraging of the financial and private sectors — the mortgage book of the Spanish financial system is not growing. And even though we have the TLTRO redemptions — which we will discuss more later — all in all there will be more issuance from Spain, but not huge amounts.

So the strong order book we enjoyed this year reflected all these arguments, and a combination of a more stable rates environment and strong credit fundamentals bodes well for cédulas issuance going forward.

Day, The CBR: Turning to Italy, how are covered bonds fitting into your funding plans?

Paolo Labbozzetta, Mediobanca: I should start by noting that we are just entering our Q4, since Mediobanca’s fiscal year starts in July and ends in June. We were lucky and swift enough to have been able to issue our last covered bond in June 2022, and then were able to tap that at the beginning of August 2022, right after the Italian government crisis. The timing of our issuance was based on two elements.

Firstly, we were anticipating a potential delay in the transposition of the EU covered bond directive into national law, which indeed transpired — although the length of the blackout period that the whole banking industry faced was completely unexpected. We were also aware that summer was approaching, and we then had a rapid rise in interest rates and challenging market conditions, so we issued in June instead of waiting until the autumn, which might otherwise have been the case.

Secondly, our decision to issue was also based on the fact that the ECB was still participating with some 30% of new issues and we wanted to take advantage of that last window of opportunity in terms of CBPP3. We were thus able to issue €750m, which was the target in our funding plan, so in practice the legislative blackout did not affect us at all, given that we typically issue one covered bond per year.

For the coming fiscal year, we will naturally include covered bonds in the programme, although we will issue our funding plan at the end of May. We are working actively with the other Italian banking players to speed up the transposition process so that this saga should finally come to an end and banks will be ready to issue again towards the summer.

One factor that probably distinguishes us from other banks is that we never used covered bonds as collateral for TLTRO operations. Starting from the first TLTRO programme, we have always kept covered bonds as a pure funding tool. We have wanted to keep investors engaged so have worked hard to be able to have sufficient production to sustain our regular funding activity through covered bonds. And so today, we are not in say a rush to replace TLTRO with covered bonds, since we are replacing that funding from other sources. We are nevertheless looking forward to issuing covered bonds again, as per our regular funding activity, in the autumn, once the backlog of supply from Italian players should have cleared.

Stefano Marlat, Crédit Agricole Italia: Our fiscal year matches the calendar year. In 2022, we completed our issuance in the first half of the year. As Paolo said, we were then waiting on the transposition of the EU legal framework in Italy. It was therefore not possible for us or any Italian issuer to approach the market at the start of 2023. At the end of the day, seeing how crowded the market was at that time, having to wait had its upside. But for 2023, we have in our funding plan the idea of approaching the market with a covered bond, simply because from the beginning we have told investors that we would come to the market on a regular basis, which is what we have done in the past.

Covered bonds are the only asset class that we issue on the market — our funding otherwise comes from a mix of our clients and, for bail-in-able instruments, our mother company. That’s why we have in the past issued long and extra-long maturities — it is not so easy to achieve such duration via private customers, and covered bonds offer this possibility. So it’s not a question of needing liquidity, but of managing maturity. For this reason, we prefer to be free to decide if market conditions allow us to approach the market. In this regard, we are not using market funding to pay back TLTROs. We can therefore wait to see how market conditions develop.

When might issuance occur? Our best forecast is June — surely not before, because it will be impossible for us to be ready given the timing of the Bank of Italy’s final publications. So it will be interesting to see what the market looks like from June onwards. At the start of the year, everybody crowded into the market, but in the second part of the year, maybe it will be Italian issuers crowding in.

Day, The CBR: We’ll look ahead at that shortly, but focus a bit more on TLTROs first. Miguel, what are your expectations on their influence on covered bond issuance?

García de Eulate, CRN: Having read many reports on the TLTRO situation across jurisdictions, I think on a European overall level you can conclude that this won’t pose a problem for banks. In the case of Spain, specifically, liquidity levels are high. And so I wouldn’t expect a jump in covered bond issuance because of TLTROs per se.

However, we are all taking a deeper look at liquidity coverage ratios (LCR) and net stable funding ratios (NSFR) because of the TLTRO redemptions. These were created at a time when they were not needed because liquidity was so plentiful as a result of the expansion of the ECB balance sheet. But these ratios will decline as TLTROs are redeemed. I think that covered bonds will be the tool of choice to manage these ratios, specifically the NSFR because although deposit-taking institutions have the liquidity of deposits, covered bonds — as mentioned earlier — allow us to go for long term financing and are hence something very interesting for these ratios.

So on the one hand, TLTRO redemptions won’t lead to a rush of covered bond issuance, but on the other hand, going forward and structurally, covered bonds will gain renewed interest among issuers as a tool for lengthening the liability structure. It makes perfect sense as duration is one of the key features the covered bond product offers. And this is something we will see from Spain.

Kunze, NORD/LB: Following on from Miguel’s and Casper’s comments about banks’ funding mix, it is important to bear in mind that TLTRO III brought about a high level of retained issuance for many jurisdictions, including Italy and Spain but also some core European jurisdictions, like Belgium, for example. This implies a kind of reserve for potential future covered bond issuance. We are in a situation where mortgage markets are not growing strongly — if they are growing at all — but cover assets are available: you just unwind the retained covered bonds to free up assets for public issuance. It is not a one-to-one relationship, but if you have, say, €2bn or €3bn of retained issuance, you will perhaps be thinking about using €500m or €1bn of this for public issuance instead. This is perhaps the most important aspect of TLTROs and is good news for those banks willing to issue covered bonds. It also gives us a degree of comfort in our overall supply forecast for this year, which, at €193.5bn, is at the higher end of forecasts — this would represent positive net supply of €78bn.

For Spain, we are quite progressive and expect €12bn for 2023. Italy is something of a black box, because we don’t know how much activity there will be when it comes to the restart, and how investor appetite is, plus there can be headline risks. But we have a forecast of €9bn. Those figures would represent a net increase of around €2.7bn for Spain and €1.8bn for Italy.

Day, The CBR: As well as the end of TLTROs, the ECB is, as already mentioned, gradually stepping back from the market and already ended CBPP3 primary market purchases rather abruptly. How might the asset purchase programme (APP) develop over the rest of the year?

Kunze, NORD/LB: To be honest, I was really surprised by how fast they stopped buying in primary, because from their communication it was not so clear to us that there would be more or less a full stop within just a few trading days. Nevertheless, in the end it proved a reasonable move, at least in that there was no big market turbulence or spread widening.

A lot of quantitative tightening has already been priced in for the covered bond market. The covered bond market does not operate in a vacuum — it interacts with the other market segments under APP and PEPP, which is something the ECB always has to bear in mind. Regarding covered bonds, I would say that a reasonable path would be to undertake substantially fewer reinvestments for the second half of the year. I’m not really concerned about the ECB turning its back on covered bonds — we just expect some minor spread widening up until the middle of the year.

Day, The CBR: Let’s drill down a bit on when Italian supply is likely to pick up. We’ve seen other jurisdictions face pressure on spreads under the weight of heavy supply. What are your expectations for the restart of OBG issuance?

Labbozzetta, Mediobanca: Clearly it’s difficult to assess how activity will develop, given the volatility in both credit spreads and rates, but also the discussions the Italian banking industry and the Bank of Italy are having to speed up the transposition process of the EU covered bond directive.

Indeed, Mediobanca and others will need to issue covered bonds, but as Stefano said earlier, Italian issuers have been able to fund themselves amply again in recent months, even without covered bond issuance. The bond market has been very active and Italian issuers overall have been nimble in accessing the market in every window of opportunity that has materialised. We had huge spikes in volatility in the autumn and again in March, but the market has reopened and just today we had a financial issuer like Generali out with a subordinated bond, so another testament to the resilience of the market. I don’t see Italian issuers facing difficulties, as they might have done in the past, and hence being in too much of a rush to issue in the second half of the year. Of course, we have our funding plans to execute and covered bonds are one of the most important pillars of this, so we welcome the transposition of the directive, but I don’t foresee a development whereby too many issuers are overcrowding the market.

And given the lack of supply in the Italian covered bond space over the past year and more generally in recent years on the back of the TLTRO dynamics, I tend to think that on the investor side — and probably Niels could answer this question better than me — they will probably have room to increase their share of Italian covered bonds holdings compared to current levels. So I see the capacity to sell bonds into the market without any risk of congestion. We will have the usual process when a market segment reopens, probably with the national champions or more frequent issuers tapping the market first, paving the way for other issuers.

And so I expect, as Stefano said, activity to start picking up in June at the earliest, because I do not see anyone being ready before that, also considering the approvals that we all need. So some activity in June-July, then we will have the summer pause — which we learned from the last two or three years is definitely shorter than it used to be — and from September, October a pick-up in activity with all the other banks, not only the national champions, being out into the market.

Marlat, Crédit Agricole Italia: I had in mind €7bn-€10bn for the Italian market this year, so Frederik’s €7bn figure fits into this. And regarding the collateral point, we usually transfer around 40%-45% of new mortgage production into the cover pool, meaning that if we see a big downturn in the market, 15%-20%, that should not pose a problem in terms of generating cover pool assets for new issues.

As Paolo said, we have greater visibility on the timing of the market reopening now, and I also expect national champions to pave the way. We will then see what tenors the market is ready to accept, and what spreads are required, because if the yield curve remains as it is, compensation in terms of spread will probably be necessary to go into longer durations.

Day, The CBR: Niels, what’s your view, both on the supply dynamics as discussed by Paolo, and the maturity question raised by Stefano?

Platz Bertelsen, Nordea AM: I can confirm what Paolo said, in that I also think investors have saved some room for Italian covered bonds. When I’m in the market looking to buy Italian covered bonds at the moment, it’s impossible to find any offers. So I believe the market should be able to absorb the Italian issuances that will come in the summer.

That said, I also hear rumours that a flood of Italian covered bonds is coming and we will probably need some compensation when we know that it’s not only the first Italian covered bonds that are coming, they are also coming tomorrow and the day after that.

Touching on duration, if you look at French covered bonds at the moment, they have repriced their curve quite attractively in compensating for the longer duration. Even though there has been a lot of supply from French issuers — and I know that they’re not done yet — I think that is the most attractive place to be, because they are willing to pay up and steepen the spread curve to come in longer duration.

Returning to the overall supply picture for covered bonds, when I talk to issuers — and also from what I’ve heard today — I get the impression that there’s actually not a huge covered bond issuance need; rather, as long as the market is able to absorb issuance, it’s a tool that they will use to manage duration, but if the market closes or freezes up a bit, we could then quickly see the market lose some momentum and issuance take a breather, and that’s quite encouraging.

Day, The CBR: Ghazi, what’s your take on the outlook for Italy?

El-Salmi, NORD/LB: I would definitely agree that the market should be able to absorb a series of Italian issuers tapping the market one after the other. Several factors support that. First of all, we haven’t seen Italian covered bonds since June of last year, so as Paolo mentioned, there’s quite a shortage. Secondly, we have seen, as we said earlier, strong demand for Spanish covered bonds, and Italian covered bonds pay even higher spreads than that. Plus the seven Spanish covered bonds we discussed were all issued in just two months, and there were no negative side effects from this at all. That convinces me the market should be able to absorb increased Italian supply in a short time span, and that it should also be open for smaller issuers or those who were absent for a longer period, since we have seen in other jurisdictions that the “comebacks” were well received by investors, too. Of course, the first three transactions will probably have it a bit easier than the last three transactions, so you will probably have to compensate that with a couple of basis points of new issue premium. But that is something that can be well navigated and organised by both the issuers and the syndicate banks advising, so this shouldn’t be a huge problem.

Kunze, NORD/LB: When you talk to investors, it’s always an issue for Italian covered bonds how attractive they are vis-a-vis the government curve. But this should not lead to the wrong conclusions here — take the UK, for example: we also quite often hear that due to Brexit and LCR treatment, UK covered bonds are not so sought after by investors. However, at the end of the day, they see that those deals may also prove to be quite successful and hence want to participate. This is a dynamic we could anticipate for Italy as well.

Day, The CBR: Casper, what are your expectations for Spain and Italy?

Andersen, S&P: We are clearly in uncharted territory here due to the new covered laws and ECB stopping its asset purchases. As a credit agency, we’re not too concerned about the supply as such; we’re more focused on the underlying credits. Looking at Spain, we’re quite broad in our range of expected issuance, reflecting the new situation we’re in, so we’re pretty close to Frederik, at €10bn-€15bn, but we could see even more.

Italy may see a bigger TLTRO effect there than in Spain. But again, there are a lot of different factors at play in Italy, such as MREL requirements, so I would rather not put an actual number on it as it might not add much value. That said, we don’t see any issues around the market’s ability to absorb supply — in this roundtable, we’ve already heard about the rarity of covered bonds from Italy and even if there is a rush of issuance, we believe the liquidity and support for the product is there. We also think that the credit story is quite good in Italy, particularly on the residential mortgage side. The one concern issuers may have when issuing could be around any noise from the sovereign that can create pricing volatility. If that were the case, it will be a balancing act we expect Italy’s financial system and its banks to manage.

Returning to Miguel’s point, we also believe that Spain has a strong credit story, also at the sovereign level, although we do expect the unemployment story that has been very positive recently to continue but likely for unemployment levels to flatten out.

Platz Bertelsen, Nordea AM: Going back to the duration question, Frederik, I don’t think you would expect the remainder of the €200bn to materialise if the long end of the covered bond curve is not open. As Stefano said, issuers use covered bonds for longer dated funding, so I think that supply very much depends on issuers and investors being able to meet at the higher spreads we will require to buy longer dated covered bonds. In recent years we saw the hunt for yield, with even bank treasuries buying long dated covered bonds just to get some yield, and that flattened the spread curve quite substantially. As the yield curve is now quite inverted, most investors require some compensation on the spread.

Kunze, NORD/LB: I think we are totally on the same page here — it is reasonable to expect more longer dated deals in the second half of the year, otherwise issuers would have an issue if they issued a whole year of €194bn of more or less short dated covered bonds. Not everyone, but some issuers will go down the road of paying a higher spread in relative terms for the longer end of the curve, because they do indeed want to have the longer term funding, thinking about their maturity structure in the years to come. So we are in a situation where issuers have to find their way into the market at a more costly level, while investors have to consider whether they are getting reasonable compensation for going into the longer end. It’s going to be interesting to see how this develops, and I expect there will be winners and losers on both sides. The other factor to consider is that we are talking about euro benchmarks — some issuers could go into private placements or other currencies.

Day, The CBR: Looking more at the credit side of things, Niels, what is your view on Italy and Spain, and their covered bonds now they have transposed the covered bond directive?

Platz Bertelsen, Nordea AM: We are quite bullish on the southern European countries. As long as we avoid credit deterioration and the focus is still on fighting inflation, I agree with Miguel that southern Europe will not be the centre of the next crisis. We are much more worried about those countries with a high share of variable rate mortgages combined with high private debt, such as in Scandinavia, and we don’t see that in southern Europe. There, it’s the government who has the debt, but we have all these European programmes to transfer money to the southern European countries. We don’t see higher interest rates impacting households there to the same extent.

Regarding the covered bond directive, we are in general positive about its impact. It’s good to have a set of harmonised minimum requirements that set the standard for a premium covered bond, which makes sure that the strong features we all like about covered bonds are in place. Spain had a lot of work to do, but all in all, I find the implementation pretty positive. We now get a cleaner and segregated cover pool, which is actively managed. We get the liquidity provisions and better valuation of the assets in the cover pool, among other things. The other side is the lower OC levels, but all the other elements very much offset that. I don’t know what Casper thinks, but that’s my impression on how the directive has been implemented, that it is a credit positive for both Italian and Spanish covered bonds.

Andersen, S&P: The harmonisation drive is a positive. We expressed that when the Royal Decree was passed in Spain.

On 31 March this year, the Spanish government further amended the Royal Decree to allow issuers to actively manage the available OC and to clarify that the administrator’s right to accelerate the covered bonds upon issuer insolvency applies only if the value of cover pool assets is less than the value of the covered bonds. The added strength from the introduction of the liquidity coverage is important from a rating perspective. As Niels pointed out, of course, you go from a situation where you had basically the whole balance of the bank securing your issuance to now having fewer available assets in your cover pool. Further, you may previously have had the benefit of high margin-earning assets reflecting the whole bank book. When you then start to cut and limit the eligible assets, that gets you to lower OC levels but likely more comparable with what you have in other countries where similar limits on available OC exist. And one could ask, in the previous case, would you in reality have had all those assets in the event of an issuer’s difficulties? In our view, the investor now has more clarity as to actual OC. Yes, it comes at a bit of a potential cost, but we have seen examples where cover pool managers mitigate it by including assets that fit to the liabilities, and not by just having low margin assets, because they are the most credit-sound assets, but mixing it up in terms of what the assets earn compared to what is paid on the covered bonds. There’s maybe a learning curve there for the issuer, in terms of picking the best mortgage portfolio.

Generally, we don’t expect significant issues achieving the highest possible rating from the recently-finalised Italian legislation.

I should mention that we at S&P believe this is only the first step in terms of harmonisation. Therefore, we don’t like to start ranking implementations and state one is better than that the other. We continue to observe local flavours still present in the updated laws, which is fine, as you may not want to make too big a jump from one legal regime to another. However, we do eventually expect those differences to make their way out of future legislation — for example, the ECB may indeed step in after the EBA review and state, there is still a need to clarify or be more harmonised, and so, we expect there will be a new round of harmonisation. We consider it part of an evolution towards an eventual pan-European covered bond market. But for now, we see it as a strong first step.

Day, The CBR: Beyond the timing and internal approvals, does the substance of the updated Italian legislation pose any challenges to issuers?

Marlat, Crédit Agricole Italia: The issue was the process rather than the content. For example, in terms of overcollateralisation, the reference is not the previous level nor the updated level, but the level assigned in terms of committed OC by the rating agency — so it’s not a game-changer.

It’s a question of internal steps. You will typically have the latest financial statements approved in April and you then have to notify Bank of Italy followed by 30 days before approaching the market — luckily, because in the draft they had proposed 60 days. That’s why we are talking about June.

Labbozzetta, Mediobanca: The 60 day authorisation period seemed too harsh to the banking industry, but we had an open and fruitful dialogue with the regulator to halve this period. There were some other minor points of discussion — regarding the role of the asset monitor, for example — but these were mere technicalities that we overcame pretty easily. From a regulatory perspective, it was a massive effort, so even if there was a bit of a delay, we have the final legislation in place while some other countries have further updates outstanding, and that’s partly why it took so long. The update to the documentation only needs to be done for the first issuance, and going forward we do not see any further hurdles to regular funding activity through covered bonds. As Casper said before, there are some regional nuances in the transposition of the EU covered bond directive, but the substance is not significantly different and we now have a level playing field.

Day, The CBR: Turning to our final topic, ESG: Miguel, you are not only the issuer that did the most recent benchmark covered bond, but this was also green — like your issue last year. What are the positives in issuing green covered bonds? And what, if any, challenges are you facing on the ESG front?

García de Eulate, CRN: We have four benchmark-sized covered bonds outstanding, and two are sustainable, two are green — the last two — so you can say we are quite committed to that. Being a midsize or small bank, we really have seen richer books as a result of the covered bonds’ green label, so it’s a positive. There is much discussion about the greenium, whether it exists or not, but we don’t count on having a greenium in our strategy. The main focus of green covered bonds for us is to help put our strategy in front of investors and explain our story as a regional cooperative bank with a clear focus on ESG matters. Discussions with investors are then not just focused on the credit metrics — which are of course key and always will be — but on a longer term perspective of the bank.

Our feeling is that there will be further requirements regarding the ESG performance or ESG features of the cover pool. The feedback we get from investors, those more advanced on ESG matters, is not so much focused on the use of proceeds, or even the ESG features of the cover pool, but on the overall ESG credentials of the bank and its strategy, which is really what matters at the end of the day. Of course, you can argue that it’s a dual recourse instrument, and then in the event that you end up with the cover pool, you are interested in its ESG characteristics. But this is a quite a remote scenario that is not in investors’ perspective, which is more focused on the real strategy of the bank. What is important with investors, even if you do not print a green covered bond, is that you are open about your ESG strategy and able to communicate on what is relevant. Labelling the covered bond as green is another step, which signals your commitment and increases your transparency on that front, but what is important in being a bank is how you lend, and whether you are improving the ESG performance of your loan book, which is something that is developing every year.

Day, The CBR: Stefano, Crédit Agricole Italia has been active in green covered bonds and your group overall is very active on that front. What are the positives for you in doing that? And what are the challenges to further issuance and growth in Italy?

Marlat, Crédit Agricole Italia: A positive is that it brings great personal satisfaction — but you do it because you want to do it, not because it is convenient — it brings many challenges.

For us, being green and sustainable is one of the main pillars of our business identity, but reflecting this in the covered bond asset class in Italy was one of the most difficult challenges. This is because the stock of real estate at a national level is old — we try not to develop new housing on new ground. This means that a lot of the cover pool is based on old buildings, which are not appropriate for green issuance.

We were the first Italian bank to issue a green covered bond and it was a good experience (no need to discuss the greenium, which was not relevant). We would like to continue along this path and are looking for solutions to the issue of eligible collateral, such as renovations. But again, we find new problems. For example, we have in our systems the energy class of the building at the end of the renovation, but maybe not the starting level because it was not relevant in the past, so it becomes difficult to measure the upgrade of the building and to say if it’s eligible or not.

Day, The CBR: Paolo, what is Mediobanca doing on this front?

Labbozzetta, Mediobanca: We have been active in issuing ESG bonds since 2020, when we debuted, and we issued a second ESG bond at the end of last year. Both were senior preferred, so we have not yet issued an ESG-labelled covered bond. This is basically a function of how we look at ESG issuance activity in the broader context of the overall ESG strategy of the group, and I very much agree with Miguel that ESG issuance is just one of the bricks in the overall ESG strategy. We prefer to concentrate our ESG issuance efforts on higher beta instruments, like senior preferred. Given also the timing of those bonds, we wanted to have more traction in terms of bookbuilding. It’s not, as Miguel correctly pointed out, to have an advantage in terms of pricing — we had this in both cases, but that was not our main goal. Our main goal was to expand our investor base, including also specialised ESG investors who probably would only have participated in a deal in ESG format.

Even though our funding activity has been concentrated on these two bonds in the last three years, we have updated our framework twice in the same period, so we are very active in trying to be up to date with the latest regulation and best market practice. The market is gradually switching from a, let’s say, market-based approach towards a regulatory-based approach, with the whole process of drafting and implementing the EU Taxonomy that is underway. We have aligned the framework to the Taxonomy where possible and try to incorporate different asset classes compared to the first version of our framework in order to include ESG issuance as one of the pillars of our broad ESG strategy at group level, which also embeds efforts in ESG lending and a more cautious and more coherent approach on the asset side. It’s a journey that we embarked upon a few years ago, but we want to continue to be best in class as much as we can. And we do not exclude also tapping the covered bond market in ESG format in the future.

El-Salmi, NORD/LB: Most of the feedback we receive on transactions from German ESG-focused investors is at the issuer level, rather than the issuance level, so less focus on the ESG label, whether it is green or not, and more on the ESG ratings of the issuer, for example.

And while the greenium is probably limited in terms of any pricing advantage, the big advantage an ESG label offers versus conventional bonds is the differentiation it offers, giving issuers an additional selling point to get investors involved, which is especially important when markets are choppy or crowded.

Day, The CBR: Niels, on the investor side, how do you see covered bonds fitting into broader ESG developments?

Platz Bertelsen, Nordea AM: We are not seeing any huge demand from our clients to have a specific focus on ESG-themed bonds — green, sustainable or sustainability-linked bonds. The ESG strategy that we have implemented in our investment strategy is to look at the issuer — in line with what Miguel said. We have a responsible investment team that scores the issuer on all the three ESG factors, so not only environmental or social aspects, but the governance of the issuers is also very important.

Our focus at the moment — and this is also to cope with the SFDR requirements — is to try to assess what level of sustainable investment our funds are. When looking at covered bonds, we assume the proceeds are used to finance the mortgages in the cover pool, so the task is to quantify a level of sustainability of the assets in the cover pool. Around 40% of total energy consumption in the EU stems from buildings, and according to the Carbon Risk Real Estate Monitor there needs to be a 91% reduction of greenhouse gas emissions (GHGe) by 2050 for that sector to be Paris-aligned, so meeting this target is where we see sustainability make sense for covered bonds.

So you can draw a trajectory from where we are now to where we have to arrive at in 2050, and at any point in time you can look at what share of a cover pool is above or below, and in our view that is the level of sustainability of a covered bond.

Calculating that requires a lot of data at the cover pool level that we don’t have. Ideally, we’ll have GHGe from all the assets in the cover pool. That is not possible, so the next best thing would be to have how energy efficient the assets are and combine it with the energy mix used to proxy the GHGe. Energy performance certificates can play an important role in this but some issuers have also estimated or modelled the part of the cover pool that doesn’t have an EPC score. Our responsible investment team have been doing a lot of work on this method which we would like to implement. The idea is use this to overweight issuers or countries with better cover pools to construct a more sustainable portfolio for clients who have that as a target. We see that as more “real world change” than just buying green covered bonds. I’ve entertained Miguel with this story before and they have actually been quite good at mapping the energy efficiency of their cover pool, so I know it’s possible in Spain even though EPC scores are not that widespread. It is something we will encourage issuers to look at.

Andersen, S&P: Data availability is also a challenge from our perspective: when we have to come to a decision on credit risk, we can’t do it on the basis of a hunch or a feeling; we need historical performance data to support our views. We can probably all agree that a house price decline is likely to be lower if you have all the newest technology, insulation and so on, but can we say how much less such a house price decline will be for an ‘A’ than for a ‘D’ EPC house? That’s one of the challenging questions. We are all here working on trying to gather more information to guide our actions. The covered bond issuers can help shape the future of sustainable covered bond issuance by gathering performance data, identifying and sharing the key sustainable credit characteristics.

Click here to download a pdf version of this roundtable.

After a mandate announcement yesterday (Monday), Credito Emiliano (Credem) leads Barclays, BNP Paribas, Crédit Agricole, Natixis and UniCredit opened books with guidance of 20bp-22bp over mid-swaps for the €500m no-grow seven year OBG, expected ratings Aa3/AA (Moody’s/Fitch). They ultimately priced the new issue at the wide end of the range, 22bp, after providing an update that books were above €500m, with €175m of this being joint lead manager interest, and likely including a €150m CBPP3 order, according to a syndicate banker away from the leads, given the time that had elapsed between books being opened and the update being towards midday CET.

“Apparently it was hard work, to say the least,” said another banker away from the leads. “They started somewhat unusually with the 20bp-22bp, will price in range, to indicate from the start that 20bp was the furthest they would go, but that didn’t seem to help them because they had to price at the upper end, and at that level it was just covered.

“So definitely another good illustration of how things are going – or not going – at the moment.”

Another banker away from the leads put fair value at around 15bp, implying a new issue premium of some 7bp.

Swedbank Mortgage leads DZ, HSBC, LBBW, Natixis and Swedbank opened books this morning with guidance of the mid-swaps plus 9bp area for a euro benchmark-sized May 2027 covered bond, expected ratings Aaa/AAA (Moody’s/S&P). After around 55 minutes, they reported books above €1bn, excluding joint lead manager interest, and after close to three hours, the spread was set at 6bp on the back of books above €1.45bn, including €80m of JLM interest. The deal was ultimately sized at €1bn (SEK10.5bn) on the back of orders above €1.5bn.

“This was a successful transaction,” said a banker at one of the leads. “As we know, the market is no longer as reliable as it was a few weeks ago – we have seen a lot more supply and that has made people a bit slower in responding to new issues, which leads to books building more slowly.

“But this was the right name, the right jurisdiction, the right maturity – and at the right price. €1bn at 6bp offers value to everyone involved.”

Swedbank’s deal comes after compatriot Länsförsäkringar Hypotek (LF Hypotek) issued the most successful of three euro benchmarks yesterday, a €500m five year. Demand reached some €1bn within an hour of initial guidance of the 10bp area being released for the €500m no-grow trade, and guidance was then revised to 7bp+/-1bp, WPIR, on the back of some €1.25bn of orders. The spread was ultimately set at 6bp on the back of around €1.3bn of demand, with some €1.2bn good at re-offer.

LF’s deal was seen as offering a new issue premium of 3bp and Swedbank’s, 4bp, the latter based on a SEB June 2027 issue launched in March trading at 2bp, mid, according to the lead banker. He noted that Swedbank’s deal was twice the size of LF’s, saying Swedbank’s stronger name explained its ability to achieve this.

“It can be taken for granted that if they had limited themselves to a smaller trade, 5bp would have been possible, but that was not on the cards,” he said. “Swedbank is in a different league and €500m would have been punching below their weight.”

Another lead banker said that pricing 1bp tighter or wider was also a minor consideration given that Swedbank was able to achieve pricing some 15bp inside what is available in its domestic market, noting that this explained the Swedes’ willingness to issue in five years when they typically tap euros for longer maturities than are readily available in Swedish kronor.

He said Swedbank mandated at short notice after the success of LF’s trade, with the latter having been awaited for some time. Swedbank had been targeting an issue by the end of June, ahead of its black-out period, but also accelerated its plans in view of possible Canadian supply next week.

“They have printed €20bn or so already this year, but our understanding is that they are not done yet,” he said. “Their numbers come out mid to end this week, so next week is a potential window for Canada and they might come wide, if you look at where they have priced recently.

“That put the pricing of Swedbank and similar names at risk.”

The two five year trades outperformed longer-dated issuance from DZ Hyp and Crédit Agricole Home Loan SFH yesterday.

DZ Hyp priced its €750m nine year mortgage covered bond at mid-swaps plus 5bp on the back of a final book of around €860m, including €75m of JLM interest. The pricing was tightened 2bp from guidance of the 7bp area, with the size set after a little over two hours, when the guidance was revised to 5bp+/-1bp, will price in range, on the back of books above €980m, including €45m of JLM interest, and the peak book size was above €1bn, including €75m of JLM interest. Bankers put the new issue premium at 4bp.

Crédit Agricole Home Loan SFH tightened pricing just 1bp from initial guidance of the 11bp area to a re-offer of 10bp for its €1bn eight year covered bond, which bankers said reflected a new issue premium of 5bp-6bp. A first update after around two hours had put demand above €1bn, before guidance was revised to 11bp+/-1bp, WPIR, on the back of books above €1.45bn, including €150m of JLM interest, and the final spread was ultimately set on the back of books above €1.55bn, including €175m of JLM interest.

A syndicate banker involved in yesterday’s supply said longer maturities remain more challenging.

“They followed more or less the same pattern: both started 6bp-7bp wide of fair value, and both of them had an uphill battle to get towards what they had been hoping for. In the end, they went slightly different routes, with Crédit Agricole apparently going for €1bn and so they limited themselves to taking only 1bp off the table. For DZ Hyp, it was more of a mixed calculation – they definitely appreciated the 2bp performance, but were willing to conceded 1bp for the larger than minimum size.

“But again, both transactions are good evidence that it’s no longer smelling of roses here.”

Landesbank Saar also sold an inaugural, sub-benchmark social public sector Pfandbrief today after a mandate announcement yesterday. Leads Helaba, LBBW and UniCredit this morning opened books with guidance of the 12bp area for the €250m no-grow May 2032 issue, expected rating AAA (Fitch). After around an hour, they reported books in excess of €250m, excluding JLM interest, and after around two hours and 20 minutes, they revised guidance to 11bp+/-1bp, WPIR, on the back of books above €318m, including €25m of JLM interest. The deal was ultimately priced at 11bp on the back of books above €340m.

And after a mandate announcement yesterday, Oberösterreichische Landesbank (Hypo Oberösterreich) became the latest Austrian to hit the market this morning. Leads BayernLB, Deutsche, Erste and RBI opened books with guidance of the 15bp area for the €250m no-grow June 2029 mortgage covered bond, expected rating AA+ (S&P). After around an hour and 10 minutes, they reported books above €250m, excluding JLM interest, and after close to two hours they set the spread at 15bp on the back of books above €280m, excluding JLM interest. The final book at re-offer was above €300m, including €5m of JLM interest.

Bank of Queensland is holding investor calls today and tomorrow ahead of a planned five year euro benchmark conditional pass-through (CPT) covered bond. BNP Paribas, Commerzbank, ING, NAB and UBS have the mandate, which was announced yesterday.

The planned issue will be only the second euro benchmark covered bond from Bank of Queensland, following a €500m (A$750m) five year debut in May 2019.

Syndicate bankers expect the primary market to now remain quiet until next week, with Ascension Day public holidays in many parts of Europe on Thursday and the window having likely passed for CBPP3-eligble issuers to print deals settling in May, thereby avoiding the risk of facing a cut in Eurosystem orders for trades settling in June.

“Maybe a break is in everyone’s interest,” said one. “We’ve seen each day bring another 5%-10% loss in momentum, so let’s step away for a few days and give the market the opportunity to digest what has been issued so far.”