Portugal

Banco Santander Totta surprised the market on Tuesday, announcing a mandate and setting initial price thoughts for a new five year benchmark of undetermined size.

Five Portuguese covered bond deals were upgraded on Friday by Moody’s, in a move that had been widely anticipated following the sovereign upgrade. But the upgrades came against an increasingly volatile credit backdrop which saw some peripheral covered bonds soften as their respective sovereign markets came under pressure.

Many Portuguese covered bonds could have their ratings upgraded soon, after Moody’s raised the Portuguese sovereign rating last Friday. Banco Santander Totta’s most recent deal, which is a strong candidate for upgrade, was trading 8bp tighter from last week on Monday, but this was due to ECB rate cut hopes, and not credit upgrade hopes.

Credit sentiment is positive, and it seems unlikely that the European Central Bank would take anything other than an accommodative stance at next week’s policy meeting, but bankers are getting cautious that valuations are becoming overstretched, particularly in those markets which have until now been considered safe havens.

There was never much doubt that Banco Santander Totta’s first deal since the bailout of the Portuguese government would be a success. The choice of maturity and alluring spread made it an easy choice for the risk-averse and yield hungry. Totta’s first funding in four years attracted one of the largest oversubscriptions and most granular books for a deal of its size.

After a four year absence, Portugal’s Banca Santander Totta mandated leads for a three year euro covered bond to be launched on Tuesday subject to market conditions. The short three year tenor was applauded by bankers, who wondered whether the issuer might be able to fund with a double digit spread pick-up over mid-swaps.

Investor appetite has shifted to non-national champions, bankers told The Cover on Wednesday, with the window for issuance wide open for lower rated peripheral banks. A Portuguese issuer could step forward soon, one banker said.

Moody’s and DBRS have upgraded the Series 1 covered bonds of Portugal’s Banco de Investimento Imobiliario (BII) after they were restructured using a pass through mechanism. The notes will be retained and are designated purely for central bank funding. Parent bank, Banco Comercial Português (BCP), is monitoring the market and, if it were to issue a publicly syndicated deal, it would use its existing programme structured with a soft bullet maturity, said bankers.

Nine euro issuers took advantage of strong market conditions to raise €8bn in covered bond funding during the first week of the year. The issuers collectively attracted €17bn of demand spread over more than 900 orders, but the pick of the bunch were two borrowers from Spain and Portugal who attracted by far the highest levels of over-subscription over the broadest range of investors.

Portuguese and Spanish issuers, Caixa Geral de Depósitos and Banco Mare Nostrum launched deals on Wednesday that, despite being aggressively priced, were heavily oversubscribed. The deals showed demand is clearly skewed to higher yielding credits, boding well for second and third tier peripheral issuers who are looking to cut central bank funding dependence.

The year’s first batch of covered bond issues have been easily absorbed by a wide range of investors producing comfortably oversubscribed books. The first peripheral deal mandate has come from Portugal and another from Spain is expected shortly.

Cover pool encumbrance was steady last year versus the previous year, Fitch said on Thursday. The most stable levels were among the most encumbered institutions, where covered bonds have made up a large share of their financing for a long time.