HSBC’s covered bond team planned its winning strategy for ING’s covered bond issue around confidence building, and gathered interest in a cautious market through shadow bookbuilding. Edward Russell-Walling reports.

Just as the covered bond market thought it was staring into the abyss, along came ING with its debut issue. By successfully raising €1bn – albeit at a price – it showed that benchmark deals can still be done, given a good story, a careful strategy and plenty of commitment.

Working as joint bookrunner alongside ING itself, Barclays Capital and ABN AMRO was the HSBC-covered bond team, which has become something of a specialist in inaugural issues. Its successes have included debuts for Nordea (the first euro benchmark covered bond out of Sweden) and BNP Paribas. In January, it was joint bookrunner on HSH Nordbank’s €1bn jumbo shipping pfandbrief, the first of its kind.

So when ING began to contemplate covered bonds as a way of diversifying its funding tools and reaching a different investor base, HSBC was a natural choice of partner. ING was ready to issue in this format by the autumn of last year but, given the state of the market at that time, decided to hold off.

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Winning team: (clockwise from top left) PJ Bye, Christian Moor, Andrew Porter and Hugo Moore

“Since last summer we have seen volatility and concerns right across the markets,” says Andrew Porter, HSBC’s global head of covered bonds. “Covered bonds have been affected, too, though they have held up significantly better than some other sectors in terms of primary market volumes and secondary spreads.”

Investor caution

The covered bond deals that have seen the light of day have been smaller than before, however, because the fast money accounts are no longer in the market and real money investors are a lot more cautious than they once were.

Spreads have widened more for paper issued in non-legislative jurisdictions, such as the UK (although legislation was finally introduced there in March) and the US. Jurisdictions where covered bond laws do exist are not all regarded equally, however. There has been no benchmark issuance this year out of Spain, Ireland or the UK, for example, because of worries about their property markets. There have been deals from Germany, France and Scandinavia, where there are fewer concerns. But the non-legislative primary market had been silent since the middle of January.

Uninspiring feedback

Many would-be covered bond issuers had been out on the road taking soundings but the feedback from investors was invariably insufficiently inspiring for transactions to materialise. It was against this unpromising backdrop that, in mid-February, ING finally determined that it would act to get its covered bond programme moving. It met with its bookrunners to determine a strategy to introduce the programme to the market and carry out a trade.

“A lot of other borrowers had announced programmes and then not proceeded,” says Mr Porter. “The challenge was to ensure that an announcement would lead to a swift and successful execution.”

ING had a number of factors on its side that, when combined, created an advantage that other aspiring issuers lacked. “First, ING is a great name, with a good credit story,” says Hugo Moore, a director responsible for frequent borrowers in HSBC’s debt finance and advisory division. “Next, it is a new name in the covered bond market. And finally, the Netherlands is a well-liked and strong jurisdiction.”

As of today, the Netherlands does not have a legislative framework for covered bonds, although it will have one from June this year. It is a relatively young market with (until now) only two active issuers: ABN AMRO and Achmea. But the market does enjoy strong support from domestic investors, something that was to prove a powerful benefit for ING.

On the road

On March 3, a two-team roadshow set out across Europe, visiting 10 countries in a week. “It was important that this was done in a compact timeline, compressing the period between seeing the first investors and seeing the last,” Mr Porter says. “That allowed us to maximise the breadth of investors, and to inject some urgency into generating interest and orders.”

The last day of the roadshow, a Friday, turned out to be particularly volatile in the bond markets. There was speculation that tighter margin requirements from banks were forcing hedge funds to liquidate their government bond positions, which caused wholesale widening of spreads in European government markets.

Even so, the Dutch bank did not break its stride. “ING got strong feedback, which gave it the confidence to go to a wider audience,” says PJ Bye, HSBC managing director of DCM syndication. “So the week after the roadshow, with it still fresh in investors’ minds, we waited for a period of market stability when we could leverage their interest and build a book for a specific transaction at a specific price.”

Dutch interest

Dutch covered bond investors were especially keen on a trade and had indicated interest adding up to several hundred million euros. The Monday was not promising but on Tuesday the investment bankers began a discreet process of shadow bookbuilding, with no on-screen announcements, tightly focused on the most promising accounts. The fact that word did not get out into the wider marketplace was a measure of the control that the syndicate maintained over the process.

As expressions of interest grew, the talk became more specific and on Wednesday the teams suggested a possible five-year transaction priced at mid-swaps plus 30 basis points (bp). While many issuers prefer five-year trades, to extend their debt profiles, they have tended to offer investors a choice between three years and five. Given the uncertainty in the markets, the response usually favours the short end and many recent deals have been three-year propositions.

“ING decided to go for five years and not to give investors the choice,” says Mr Bye. “It was five years or nothing – and that proved to be the right decision. The response was strong enough to go ahead.” Giving investors a specified maturity and price to mull over in the shadow bookbuilding phase was important in building genuine interest and giving the deal momentum, the leads believe. “We didn’t want to be vague,” says Mr Bye. “With so many issuers looking for feedback, investors want maximum clarity on what they are being asked to opine on.”

The shadow bookbuilding drew in expressions of interest totalling about €800m. This allowed ING to demonstrate enough evidence of support for the transaction to be announced on the Thursday, when formal bookbuilding began. That was in spite of the fact that the market, which had looked more positive on the Wednesday, had once again become jittery.

Determination to succeed

Within three-and-a-half hours, orders worth €1.3bn had come in and ING priced a €1bn trade at the price guidance level of mid-swaps plus 30bp. That was the highest spread on any new AAA covered bond and evidence of ING’s determination to succeed. Comparable ABN AMRO paper was trading in the low 20s over swaps, so given a new issue premium and market conditions, the pricing was not unreasonably extravagant. It tightened by 1bp in secondary market trading.

Dutch investors accounted for a hefty 18% of allocations, while Germany and Austria combined took 41%. That was driven by a strong technical bid out of Germany, where there will be a lot of pfandbrief net redemptions this year – about €60bn. Banks took 35%, asset managers 27%, and central banks 14%. The latter was pleasing, given that many central banks take time to get lines in place for new issuers.

In all, the deal showed that, with judicious planning and a convincing case, it is still possible to get benchmark transactions away in an unsettled market. ING’s whole-hearted commitment to the transaction played an important part. “ING was not afraid of the market,” says Christian Moor, a director in HSBC’s structured finance division.

The entire strategy was planned to give ING the confidence to proceed in stages, according to Mr Porter. “This was the trade that showed the market was not shut,” he says. “Investors were thrilled to see this transaction, which has provided a boost of confidence for other issuers, showing that they too can get trades done.”

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