After completing a roadshow last week, RBI opened order books on Wednesday for a €500m no-grow 10 year Austrian covered bond. In contrast to other mortgage backed transactions, this deal was secured on a high proportion of non-Austrian mortgages originated in Central and Eastern Europe.
For this reason Moody’s rated the bonds Aa1, as opposed to the Aaa rating that most Austrian mortgage backed programmes receive.
According to the ratings agency, RBI’s cover pool is comprised of 15.2% residential loans and 84.8% commercial loans, of which 48.1% are located in Austria and 18.8% in Germany. In the cover pool, 11.8% of the mortgages loans are located in countries with a sovereign ceiling rated less than Aa3, with 7% originated in Romania, 3.4% in Bulgaria, and 0.7% each in Hungary and Croatia.
Moody’s awarded the programme’s cover pool a collateral score of 16.9%, which is among the weakest in Austria. UniCredit Austria has a collateral score of 10.7%, Erste’s pool has a score of 8.1% and Hypo Noe’s pool has a score of 7.9%. A lower score signifies a higher credit quality.
Strong name, weak pool
As a consequence of the weaker cover pool quality and the lower rating, the joint leads — DZ Bank, Mediobanca, RBI, Société Générale and UniCredit — began with a generous initial price guidance of 14bp over mid-swaps. After one hour orders exceeded €700m and after two hours, when demand was more than €1bn, the spread was set at 11bp.
At the initial spread of 14bp over, the bonds offered a pickup of at least 10bp over 10 year deals issued earlier this year by UniCredit Bank Austria, Erste Bank, Raiffeisenlandesbank Niederösterreich-Wien, and Bawag. The initial spread also offered a 7bp pick up against Volksbank Wien’s 10 year issued on November 11.
The spread was also compelling compared to a range of 10 year deals recently issued by core European banks, such as Caffil and Deutsche Kreditbank, whose bond issues were priced in November respectively at 2bp and 3bp over mid-swaps.
Although the cover pool is much weaker than all Austrian deals, RBI is considered a strong systemically important bank that is likely to be considered too big to fail by the Austrian government, said a syndicate manager. Partly for this reason investors were more prepared to overlook the pool and begin price comparison with stronger names like Erste, the same person said.
He suggested that the longer maturity of RBI’s deal was worth 1bp, the lower rating was worth 1bp and the debut nature of the deal was worth another 2bp. Taking account of all these factors, fair value was seen in the context of 8bp over mid-swaps suggesting a 3bp new issue concession was paid at the re-offer spread.