Covered issuers gain upper hand

Issuance volumes may down in the covered bond market this year but that has handed pricing power to borrowers.

€115bn of benchmarks were priced in the first six months of this year versus €131bn in the same period in 2023.

That has allowed issuers to crush new issue premiums to near zero, crank in pricing from initial price thoughts and even issue in longer tenors.

Investor demand is markedly stronger so far this year compared to 2023.

While volume was slightly reduced from January through July this year compared to the same period in 2023, the difference does not go far in explaining the marked variation in demand. Oversubscription ratios have climbed this year to 3.1 times deal size on average from 2.1 times in 2023.

The most oversubscribed deal of 2023 was DZ Hyp’s €500m 3% January 2026 green Pfandbrief from January, attracting a book eight times its final size. This year, however, eight deals have already matched or exceeded that level of demand.

For instance, on February 26 this year, TSB returned to the euro covered bond market to print a €500m 3.319% March 2029 mortgage-backed bond with a €4.25bn book. The next day, Iccrea landed a €500m 3.5% March 2032 deal that was oversubscribed 10 times over. Iccrea’s feat was even more notable as the Italian firm shared the spotlight with a €1bn 3.304% March 2029 deal from UBS that attracted €7.4bn in demand, one of the largest books of the year so far.

However, both of these outcomes pale in comparison to the 14.8 times covered book Caffil garnered in early May as it sold the first 15 year deal in over two years. Books for the French €500m 3.125% May 2039 public sector print closed at more than €7.4bn.

The difference in demand this year has affected issuers’ ability to tighten the spread from initial pricing, which has been much greater this year. Issuers across the market have been able to harness the larger demand in 2024 to rein in pricing by 6.8bp on average during bookbuilding, compared to 3.4bp last year.

This increased demand has helped to push concessions down too.

This year, the average new issue premium on covered bonds stands at 2.6bp. Last year, that figure was 5.5bp.

The start of 2024 was a comparatively rocky period for concessions compared to later in the year, as issuers flooded the market with fresh bonds.

On January 9, for example, the German pair Deutsche Pfandbriefbank (PBB) and Bausparkasse Schwaebisch Hall had to offer 18bp and 11bp concessions, respectively, with PBB’s 18bp being the highest premium of the year to date.

As issuance slowed in February — a month peppered by a still impressive 20 syndications — premiums started to shrink.

The average monthly new issue premium fell from 5.5bp in January to only 1.5bp in February.

The highest and lowest concessions in February both came on February 21 — as Hamburger Sparkasse paid a premium of 6bp for its €500m 3% February 2031 note and Crédit Agricole landed its €1.5bn 3% December 2030 bond 1bp inside fair value.

However, premiums were set to trend even lower. By mid-March, concessions had stabilised at close to zero — a figure that has held steady since.

Since March, concessions have been very steady. Between April and June, new issue premiums ranged from a wide of 3bp to a tight of minus 1bp, and averaged 0.7bp.

During that part of the year, however, bankers started questioning how meaningful new issue premiums in covered bonds were, as secondary levels became increasingly divorced from primary market pricing. In fact, in mid-March, the Korea Housing Finance Corporation’s €500m 3.124% March 2029 social mortgage bond was priced an unheard-of 10bp below its secondary curve.

Issuers have been able to borrow in longer tenors this year compared to last. Roughly 7% of covered bond benchmarks in 2023 had tenors of 10 years or greater. That figure was 18% in 2024.

This year, 160 deals took place in the first half. In 2023, there were 171. Deals longer than 10 years accounted for 27 and 16 of these, respectively.

Indeed, the average tenor throughout 2023 was only 5.1 years. This number, however, was supported by a first half more receptive to longer dated issuance, with the average tenor falling to 4.3 years in the latter part of 2023 as investors and issuers opted for shorter and shorter deals.

But the return of an appetite for duration marked the first half of 2024. During this period, the average tenor climbed to 6.7 years.

Last year, long distance runners in the covered bond market hit a wall at 10 years, with no issuers venturing further along the curve. This year so far, eight issuers have raised funds at 12 years, with one even extending as far as 15 years.

Worsening issuance conditions in 2023 discouraged long dated deals. The end of ECB buying under its Covered Bond Purchase Programme (CBPP3) in March was followed by a banking crisis that consumed Silicon Valley Bank and Credit Suisse, suppressing investor risk appetite early in the year. Those issuers who went ahead resigned themselves to paying costly concessions for bonds of at least 10 years.

In June 2023, for example, LBBW’s €500m 3.25% June 2033 public sector print paid a 9bp concession. That same month, Eika Boligkreditt and Commerzbank each put up with a new issue premium of 7bp to issue their own June 2033 notes.

Much more favourable conditions this year have incentivised issuers to go for duration. Investors rushed to lock in duration — and the corresponding higher returns — earlier this year as rate cuts loomed. Long term prints have paid very low concessions since the start of 2024, reflecting the more stable environment and investors’ expectations of lower interest rates soon.

In 2024, benchmark euro bonds longer than 10 years have only needed to offer an average 1.9bp premium — a far cry from the 5.2bp required last year.