Kommunalkredit Austria has been reducing currency mismatches in its cover pool that resulted from many of its outstanding bonds being denominated in Swiss francs while almost all its collateral is denominated in euros.

Such efforts were recognised by Moody’s in March, with the rating agency then upgrading the Austrian infrastructure finance specialist’s public sector covered bonds from Baa3 to Baa2.

The latest upgrade was prompted by a further reduction in the currency mismatch after Kommunalkredit’s recent repurchase of Sfr140m (Eu126.6m) of its Swiss franc-denominated outstandings and issuance of a Eu300m social public sector covered bond on 4 July – its first public covered bond since 2014.

Kommunalkredit’s improved credit profile is reflected in its counterparty risk (CR) assessment, which is, however, not disclosed as Moody’s does not publicly rate the issuer.

The Baa1 rating takes also into account that Kommunalkredit intends to maintain a minimum overcollateralisation level of around 10%.

Kommunalkredit Austria is inviting bondholders to tender, by 12 May, their Swiss franc covered bonds – due in 2020, 2022 and 2026 – for a total of up to Sfr200m (Eu185m).

“Through the tender offers, Kommunalkredit intends to realign the currency structure of the Swiss franc-denominated covered bonds and the predominantly euro-denominated cover pool,” the Austrian issuer said. “For future funding requirements, which may arise, Kommunalkredit intends to issue covered bonds, among other instruments.”

According to Kommunalkredit Austria data, Swiss franc covered bonds constituted Eu632m equivalent, and 73.6%, of its outstandings as of 31 March.

Moody’s cited an ongoing reduction in foreign currency risk as one factor behind an upgrade of Kommunalkredit Austria’s covered bonds from Baa3 to Baa2 on 17 March.

The run-off of the wind-down entity of the old Kommunalkredit Austria, KA Finanz, will be accelerated, according to a plan it announced on Wednesday of last week (26 April). It is seeking a refinancing facility from an Austrian government-owned entity (ABBAG) that will replace its current refinancing, with its run-off horizon envisaged to be shortened from a 2040 deadline to as early as within 10 years, it said. Outstanding bonds will be redeemed in full at their relevant due dates.

The rating agency cited action taken by Kommunalkredit Austria to reduce currency mismatches in its cover pool resulting from the majority of its covered bonds being denominated in Swiss francs while almost all collateral is denominated in euros – something Moody’s noted is unlike most other Austrian programmes (and which is hedged with swaps that are not part of the cover pool).

“This currency mismatch has been reduced over the course of the last year as Swiss franc-denominated covered bonds have been repaid at their maturity date,” it said. “Now 73.5% of the issuer’s covered bonds are denominated in Swiss francs and we understand from the issuer that he will focus future funding activities on euro bonds to further reduce the currency mismatch in the programme.”

The Swiss franc share of the cover pool is down from 81.5% at the end of 2015.

Credit risk in the programme has been reduced, said Moody’s, thanks to a “rebound” in the credit strength of the State of Carinthia – which according to a cover pool investor report constituted 9.2% (Eu122m) of the cover pool as of 31 January. The Austrian region was upgraded from B1 to A3, “reflecting a massive reduction in Carinthia’s contingent liabilities as the KAF fund backed by the Austrian government (Aa1 stable) acquired HETA instruments for which Carinthia is statutorily liable as deficiency guarantor”.

The covered bonds had been cut to Baa3 in February 2016 following the split of Kommunalkredit Austria and its programme in two.

The Austrian issuer today announced the mandate for a euro public sector benchmark covered bond to be launched after a series of investor meetings scheduled for the end of January/early February. HSBC, LBBW, Natixis, Raiffeisenbank International and UniCredit have been hired as lead managers.

The announcement comes after Kommunalkredit Austria (KA) in September sold its first euro benchmark covered bond since February 2011, with the issuer intending to tap the market on a regular basis to refinance redemptions.

An official at KA today told The Covered Bond Report that this month’s roadshow is targeted at investors the issuer was not able to meet when it last conducted a series of meetings, and that the issuer has two issues maturing in February, a Eu860m euro issue and a Sfr490m (Eu396m) issue.

Belgium’s Belfius Bank was out with the first FIG euro transaction of the week this morning, a Eu500m five year mortgage-backed covered bond that will be priced at 13bp over mid-swaps.

Syndicate bankers said that the market had been in need of a slowdown in primary market activity after heavy supply in the first two weeks of the year, with blackout periods ahead of earnings announcements partly also explaining the lack of new issuance.

“It feels like the market is having a bit of a breather, which was needed,” said one. “Now we’re seeing levels coming in again and we’re well poised for anyone wanting to take advantage of a good window.”

Another said that a good number of peripheral issuers are on the sidelines waiting for further evidence of momentum in the market before pursuing new transactions.

On Belfius, leads Bank of America Merrill Lynch, Belfius, Crédit Agricole, Commerzbank and Nordea built an order book of around Eu750m for the new, Eu500m no-grow issue, which they initially marketed in the mid-teens over before setting guidance at 13bp-15bp over (will price in range).

A syndicate banker on the deal said that fair value was 11bp-12bp over, with the deal therefore having offered a new issue premium of 1bp-2bp.

The fair value assessment chimed with that given by some syndicate officials yesterday, when the deal mandate was announced. This morning one syndicate official away from the leads said the pricing was aggressive, with the deal coming flat to secondaries, while others said the spread was attractive.

One put the new issue premium at around 5bp, based on November 2017s in the mid-single digits and June 2020s at around 15bp over.

Another said that, at 13bp over, Belfius’ deal looks generous but that the leads took the right approach, with core European issuers needing to offer more of new issue concession to “reinvigorate” the investor base after recent deals have failed to perform.

“Belfius did the right thing,” he said. “I think it will trade 1bp-2bp tighter and add a more positive tone to the next batch of deals.”

He noted that Belfius’s curve widened a little bit after the spread on its new issue was announced.

The other syndicate official away from the leads said that the new issue concession was sizeable, but that other issuers, such as Nordea Bank Finland, paid similar premiums this year.

“It’s tough to get investors excited at these tight levels,” he said. “In senior, core names also struggle to get people jumping up and down.”