Banks raced to issue covered bonds in the first few months of 2023, hoping to make the most of the final days of ECB buying under its Covered Bond Purchase Programme (CBPP3). Eurozone banks issued about €33bn of covered bond benchmarks in January, versus €15bn in January 2022, and a further €23bn in February, compared to €15bn in February 2022.
Eurozone issuers had to pay an average new issue premium of 6.9bp in January, the highest average monthly premium during the first half of 2023. By April, the average premium they paid had dropped to 4.75bp.
When the ECB stopped buying for CBPP3 in March, the banking crisis that swallowed up Silicon Valley Bank and Credit Suisse began. Covered bond issuance from Eurozone banks tumbled. The same institutions sold just €3bn of covered bonds in the month, compared to €8bn in March 2022.
Eurozone bank covered issuance H1 2023
€ (bn)
Source: Global Capital’s Primary Market Monitor
It was left to non-eurozone borrowers to plug the hole, issuing €16bn in March, up from €3.75bn in February and €4.25bn in January.
Canadian institutions made up almost half of the supply, borrowing €7.5bn and paying out an average premium of 5.25bp, below the average premium eurozone issuers had paid at the start of the year. Toronto Dominion was the biggest seller by volume in March, hitting the market with a €5bn dual tranche offering.
The second largest non-eurozone issuance came from Australia, whose issuers sold a total of €2.5bn, paying an average premium of 5bp. Other non-eurozone issuers that picked up the slack in that month were banks from Japan, New Zealand, South Korea, Sweden and the UK.
As the banking crisis bit, average subscription ratios on covered bond benchmarks dropped below two times deal size, hitting a nadir of 1.5 times in June, having averaged 2.1 in January and 2.6 in February, despite those months being 2023’s biggest for issuance at €37.3bn and €26bn, respectively.
At the same time, issuers struggled to tighten spreads from initial price thoughts by the same amount achieved earlier in the year. During January and February the average spread move during execution had been 4.1bp, but from March through to June issuers could only tighten by 3.3bp on average.
Average new issue premium and coverage ratio on covered bond benchmarks
Source: Global Capital’s Primary Market Monitor
April angst
Perhaps unsurprisingly, given the industry crisis that began in March, the worst month was April when issuers only tightened by 3bp on average.
Issuers grasped the nettle from July, paying bigger premiums. The average premium for July jumped up to 6.7bp versus the 4.9bp average for the first half of the year.
Buyers returned and the average subscription ratio rebounded to 3.4 times deal size, the highest of any month during the year. Of the nine deals that were sold that month, three — from Aareal Bank, ANZ and Crédit Agricole – achieved cover ratios of six or above.
The average premium paid out for September was 8.2bp — the highest of the year. However, demand fell thanks to volatility in the rates market and rising yields. The cover ratio during September fell to 1.94 times while issuers could only tighten pricing by an average of 2.6bp during execution.
Investor caution rose again in October as conflict flared in the Middle East, but issuance continued, taking volumes to over €180bn by late November, not far off 2022’s full year €200bn.
But the average subscription ratio in November fell below 1.9 times versus the yearly average of two times with some deals going unsubscribed.
Several borrowers failed to tighten pricing at all as dealers noted high volumes had already pushed investor credit lines to capacity.