November 9, 2012 / 5:55 PM / 5 years ago

Dollar-covered bonds back in limelight

Nov 9 (IFR) - The US dollar-covered bond issuance space was in the limelight this week, with two issuers raising a total US$2bn from deals that added more depth to an asset class whose acceptance is clearly growing among investors.

Sparebank 1 Boligkreditt raised US$1bn from a seven-year covered bond that was only the second-ever US dollar-covered bond beyond five years, while Credit Mutuel-CIC Home Loan ended a two-year impasse by issuing the first US dollar-covered bond by a French institution since 2010.

Both deals saw huge order books, indicating that North American investors were now warming up to more risk exposure in European credits.

The first to hit the market was Sparebank, expected Aaa/AAA, which announced a benchmark sized seven-year bond on Wednesday.

Coming via Bank of America Merrill Lynch, Barclays, Citi and JP Morgan, the deal was Sparebank’s second covered bond this year. In September, Stadshypotek also issued a seven-year covered bond; most deals before that usually carried three and five-year tenors.

“Deals were focused on three years and five - targeted to front-end rates buyers who were used to focusing on similar maturities in GSEs and SSAs (with long dated SSA paper still more of a rarity),” said one source.

Issuers were obviously looking to push maturities out to seven years, 10 years and 15 years - similar to the maturity range in the European covered bond market - but US investors weren’t really biting until September.

Sparebank’s seven-year deal confirmed acceptance of longer maturity covered bonds from known issuers.

Initial price thoughts on Sparebank’s deal were mid-swaps plus 70bp-72bp with official guidance coming in at plus 70bp - where the US$1bn trade priced.

This represented about a 6bp concession to the Stadshypotek 1.875% October 2019, which was quoted at plus 73bp or Z spread plus 64bp.

Sparebank’s deal landed about 22bp wide of its most recent five-year - the Sparebank 2.3% June 2017s - which were quoted at T plus 51bp; Z plus 48bp. This however was attributed to a negative risk tone on the day, when the Dow moved down 300 points in reaction to the US presidential election results. Book size was US$1.4bn.

The next day, Credit Mutuel was out with a US$1bn no grow 144A/Reg S five-year covered bond via BNP Paribas, Barclays, Goldman Sachs, Citi, JP Morgan, which got an overwhelming response from investors.

“French institutions have not been able to access the dollar market since BNP’s five-year issue in 2010 because of investor wariness about the headline risk around the sovereign,” said Richard Gustard, head of SSA syndicate at JP Morgan.

“The three times oversubscription seen in the Credit Mutuel deal now shows that times have indeed changed and investors are able to see through headline risks to the underlying safety in the asset pool at institutions such as CM-CIC,” he said.

Gustard noted that investors had started the year preparing for a covered bond supply of up to US$70bn but the year so far had seen only US$40bn, which made conditions ideal for issuers looking at covered bonds currently.

Initial price thoughts on the CM-CIC were mid-swaps plus 85bp-90bp and official guidance emerged at plus 85bp area. Ultimately, the issuer was able to print five-year covered bonds at plus 82bp.

The best comparable for the trade - BNP Paribas November 2015s - were quoted at plus 69bp. The three-year to five-year differential in covered bonds is considered to be typically around 15bp in most European names, so adding that to the outstanding BNP level gets plus 84bp. That indicates that Credit Mutuel priced with a negative 2bp new issue premium compared to this comparable.

Such pricing levels were possible thanks to strong investor response. The order book built to US$3.2bn in less than two hours of the trade being opened, and books closed soon after that. It was a no-grow transaction and finally 46% of the bonds were allocated to asset managers, 26% to banks, 20% to SSAs and the balance to others.

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