No one in the covered bonds market had a busier start to 2017 than Société Générale Corporate & Investment Banking, seen as a leading liquidity provider. And while others are pulling out of the sector, SGCIB perceives this as a chance to increase its share of the market, as Edward Russell-Walling reports.

SGCIB Team 0317

Europe’s primary market for covered bonds got off to an unusually brisk start in 2017, with its most action-packed January since 2012. Among the many managing banks to benefit, the covered bond team at Société Générale Corporate & Investment Banking (SGCIB) was the busiest of all.

This was not by chance. A central SGCIB objective is to rank consistently among the top five bond houses in the euro markets, according to Eric Meunier, SGCIB global head of debt capital markets (DCM) financial origination.

“In FIG [financial institutions group], we have the same ambitions, across the spectrum of senior unsecured issuance, regulatory capital transactions and covered bonds,” says Mr Meunier, who adds that the bank is one of the main liquidity providers in Europe for covered bonds. “They have been in our DNA for many years,” he says.

Certain institutions have been diluting their once full-service offerings by exiting research, trading, private placement capacity, or some other element of the value chain. Not SGCIB. Florian Moosauer, head of rates sales Europe, says: “Some banks are pulling back in covered bonds. But we see that as an opportunity to take market share.”

Ups and downs

Euro-denominated issuance has ebbed and flowed over the past decade, after reaching an all-time high – €254.8bn, according to Dealogic – in 2006. The primary market recovered fairly quickly after the financial crisis, as more banks realised they could use covered bonds to do significant amounts of funding. But then it virtually halved, from €215.4bn in 2011 to €126.4bn in 2012, the year of the euro crisis. It has more or less flatlined ever since, with varying degrees of influence from the European Central Bank’s (ECB) quantitative easing efforts.

In its third and latest covered bond purchasing programme (CBPP 3), the ECB has bought more than €200bn-worth of paper since October 2014, though its purchases are now tailing off. While spurring issuance, most notably in 2015 (the busiest year since 2011), CBPP 3 has also skewed the investor base for the asset class.

In 2012, banks made up about 34% of the buyers of euro benchmark primary deals, according to SGCIB senior covered bond analyst Cristina Costa. Asset managers were about 36%, insurance companies and pension funds 16% and central banks 11%, she adds.

Bank treasuries remain major investors, largely because the Liquidity Coverage Requirement Act now recognises covered bonds as “high-quality liquid assets”. However, with the ECB crowding out real money investors, the nature of the rest of the investor base has changed. Ms Costa says: “At end-2016, banks made up roughly 32%, asset managers 26%, insurance companies and pension funds 10% and central banks 30%.”

New jurisdictions

Ralf Grossmann, SGCIB DCM head of covered bond origination in Frankfurt, points out that the market has also expanded into new jurisdictions, both inside and outside Europe. They include Poland, Canada, Singapore, South Korea, Australia, New Zealand and Turkey, and the bank has kept pace with these developments. “We were arrangers of the first euro-denominated covered bond out of Poland,” he adds.

The issuer was Poland’s largest bank, PKO, which sold a €500m long five-year covered bond with a 0.125% coupon in October 2016. The bookrunners received orders worth €1.5bn and the re-offer spread was tightened from guidance of 20 to 25 basis points (bps) to 18bps.

This year had a very active start, despite jittery conditions towards the end of 2016. “Investors have been cash rich,” says Mr Grossmann. “And issuers have felt it would be good to issue covered bonds – on which they have clarity – before regulatory deals, where the requirements in some countries are less clear.”

SGCIB was joint bookrunner on the first two covered bond issues of 2017, reopening the two most important jurisdictional markets, Germany and France.

First out of the gate was a transaction from Landesbank Baden-Württemberg (LBBW), launched on January 3, but announced the day before so as to get everyone’s attention. After a go/no-go call, official guidance of mid-swaps minus 7bps was released for a benchmark seven-year pfandbrief deal. With an eventual book of €1.9bn, the deal was sized at €1bn. The final spread was tightened to -10bps, yielding 0.225% on a 0.2% coupon.

On the same day, SGCIB was also bookrunner on a 10-year covered bond from Caisse Française de Financement Local (Caffil). This kicked off with price guidance of mid-swaps plus 12bps area, representing a new issue premium of 8bps. The books built to more than €2bn and the final spread was set at 8bps, with a coupon of 0.75%. The size was finalised at €1.5bn, making this Caffil’s largest deal to date.

A day later, SGCIB was back in the market as joint bookrunner on the year’s first Nordic issue. DNB, Norway’s largest financial services group, had noted the strong market backdrop and decided to get in early, before an expected wave of new issues. It launched a benchmark five-year deal with guidance of mid-swaps plus 5bps, implying a new issue premium of 6bps or 7bps. Orders worth €1.5bn were logged in the first 45 minutes. They grew to more than €3bn, and a €2bn transaction was priced at mid-swaps -0bps. The coupon was a razor-thin 0.05%.

“Any fears for a tricky start to the new issuance year quickly abated, with LBBW, Caffil and DNB unveiling a very strong market window,” says Ciprian Ile, a vice president in SGCIB’s financials, covered bonds and ABS syndicate team.

Deals galore

By now, financial institutions were lining up to issue. Among the deals involving the SGCIB team was a €1.6bn long six-year covered bond from Compagnie de Financement Foncier. Swedbank raised €1bn with a 5.5-year covered bond priced at mid-swaps -3bps, while Société Générale itself sold a €750m seven-year covered bond at swaps -3bps on a 0.25% coupon.

Last year saw a handful of new covered bonds with no coupon, priced to give a negative yield. Issuers of these sub-zero bonds included Berlin Hyp (€500m), Deutsche Hypothekenbank (a €250m tap, five times oversubscribed) and Canadian Imperial Bank of Commerce (€1.25bn).

Those days are gone, at least for now. After the US presidential election, yields increased, especially at the long end. “Investors are expecting yields to rise, and there is less momentum for negative yields,” says Mr Grossmann. “If there was a dramatic revision to, say, world growth prospects, they might come back onto the agenda, but not in this environment.”

Growth of Singapore

The SGCIB team was also mandated for the inaugural euro covered bond from Singapore’s largest bank, DBS Bank. “Singapore is a growing segment,” says Mr Grossmann. “DBS did a US dollar deal in 2015 and an Australian dollar deal last year, but this was its first euro transaction.”

DBS announced the mandate in September 2016, following up with a five-day roadshow in Europe and Asia. This included unorthodox venues such as Düsseldorf, Brussels and Luxembourg. In mid-January, it launched a seven-year transaction with price guidance of mid-swaps plus 17bps area. With a €950m book, a €750m deal was priced at mid-swaps plus 15bps, with a 0.375% coupon.

It was the longest tenor benchmark covered bond for any Asian borrower in any currency. “This was the cherry on the cake for investors, who got great diversification outside Europe, with a very nice spread pick-up,” says Mr Grossmann. Given the issue’s Aaa/AAA rating, they did not have to compromise on quality.

Triple-tranche bond

Towards the end of the month, SGCIB worked on a unique triple-tranche covered bond for Crédit Agricole. This began with an eight-year and a 15-year offering, eventually sized at €1bn each with a -1bp and plus 20bps spread respectively, on coupons of 0.5% and 1.375%.

Reverse enquiries then prompted a €500m 20-year tranche with a 25bps spread and a 1.5% coupon. Orders of more than €4.3bn were received. This was the first triple-tranche covered bond ever issued, and the largest since 2011.

Annual euro-denominated issuance fell from €158.2bn in 2015 to €138.4bn in 2016, according to Dealogic. Ms Costa expects this year’s volumes to be flat to 2016. She envisages a strong first half for covered bond issuance in Europe, well supported by redemptions and cash needing to be put to work.

“But investors are not clear what will happen in the second half, with issues such as Brexit and ECB purchases,” she says. “If there is any talk of the ECB tapering or exiting the programme, investors fear spreads will widen.”

Either way, SGCIB’s covered bond clients continue to appreciate the bank as a source of liquidity. In a poll by a specialist trade magazine, SGCIB was voted best liquidity provider for covered bonds in three of the past four years. In the fourth, it was runner-up.

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