Cassa Depositi e Prestiti’s second benchmark covered bond had to be as great a success as its debut earlier this year was a disaster. The Italian issuer passed the test. Its €3 billion deal attracted orders of more than €2 billion in the first hour, and price guidance was tightened to mid-swaps plus three basis points on the afternoon of the first day of book building. The CDP bond eventually priced at an equivalent of 12.8bp over the January 2013 Bund.
So what has changed since March? First, the second deal didn’t need any hype. The excitement CDP generated for its first benchmark left investors expecting a big deal. But they failed to appreciate, and CDP failed to convey, the political necessity of tight pricing. With its first benchmark, CDP’s management had to be persuaded that covered bonds are the way to fund Italy’s infrastructure. Without a new-issuer premium, however, a lot of sizeable orders had to be ruled out instantly.
Secondly, the banks had changed. And this is perhaps the most surprising aspect of the deal. ABN Amro, Deutsche Bank and Lehman Brothers made way for Barclays Capital, Nomura, and UBM/HVB. The March deal’s leads all have enviable primary markets reputations. Nomura and UBM/HVB’s credibility, at least to date, relates more to their role in the secondary market for covered bonds. In the first deal, investors who tried to turn bonds couldn’t get liquid prices and suspected the lead group of sitting on sizeable long positions. So the perceived strengths of the new lead group helped to break the ice with investors the second time around.
It costs money to make markets. As a debate begins over the efficacy of mandatory market making in jumbo covered bonds [see Jumbo liquidity hit by a big freeze, this issue], those banks that invest in research and trading will get rewarded with mandates.
As for distribution, Nomura promised and delivered a big stake in Asia, and Barclays Capital brought its pan-European distribution to the deal. HVB helped CDP get into Europe’s core covered bond accounts. Germans comprised nearly one quarter of the order book in the second deal, compared with less than 5% German allocations the first time around. It was German and Nordic investors that gave the deal its early momentum.
Getting into the German savings sector adds to the importance of liquidity provision. These accounts now look at the performance of their bonds, as well as their security. If they want to switch, they need to be able to switch.
There are lessons for other issuers in European covered bond markets. First, forget the hype and only promise what you can deliver. Secondly, the Germans are coming. Landesbank Baden-Württemberg (LBBW) picked up its first lead role for a foreign covered bond issuer on CIF Euromortgage’s 10-year, €1.5 billion deal last month, alongside ABN, BarCap and Calyon. Non-French banks have seen France as a closed shop when it comes to underwriting mandates. LBBW is another bank differentiating itself with its combination of strong distribution and real market making. How long will it be until an issuer puts LBBW, HVB and DZ Bank together on a deal and realizes these banks can cover continental Europe?