But a fortnight after the Sabadell deal, Caixa Galicia was forced to cap the size of its two-year deal at 500 million, having had hopes of raising as much as 1 billion. The bank was forced to limit the transaction after the order book barely passed 500 million, and this despite pricing the deal at 65 basis points over mid-swaps. Caixa Galicias deal was the only one to come to market since the Sabadell deal that didnt achieve benchmark status. "The market can only absorb a finite amount within the 53bp to 65bp pricing range," says Rob Robinson, covered bond analyst at Merrill Lynch. "To get something done now, that range may not be sufficient you may have to go a little wider." It would seem that the recent spate of supply is a blip rather than a comeback.
Any market needs time to adjust when a wall of supply hits after months without issuance "Dont underestimate the impact of these supply levels," says Mauricio Noé, global head of covered bonds at ABN Amro. "Even in a good market it takes time to absorb these levels."
ECB financing allotted to Spanish banks
Record ECB repo in April
Source: ECB, Bank of Spain
Also, when coming back to market after a lengthy period of inactivity, the best credits tend to come first, followed by the weaker ones, which makes it very hard to tell if the deteriorating conditions are due to market saturation or because of the credit quality of the issuers. Moodys rates Banco Sabadell and BankInter Aa3, and they issued at 53bp and 52bp over mid-swaps respectively. Bancaja and Caixa Catalunya are rated A1, and Caixa Galicia A2. All three priced their deals at around 65bp. That the credit quality of a covered bond issuer is now a big factor in the success of its deals is undisputed, and might well have a greater share of the responsibility for the Spanish markets deterioration over the two-week period after the Sabadell deal than many people think.
For the moment, the bigger issuers such names as Santander are finding their funding needs satisfied elsewhere. Santander backed down from issuing a planned three-year benchmark deal at the end of March, and has not come back. With issuance premia so high, it is likely to stay away for the time being. "A two-year senior unsecured floater is now a very easy trade, particularly for the bigger banks," says Noé. "There is almost no execution risk, and fewer strategic implications."
As long as the big boys can price better senior unsecured deals than covered bonds, they will remain absent from the covered bond market. So the market will remain the playground of the smaller players and savings banks, and thus will remain a tricky proposition. This means that many Spanish banks will continue to go to the ECBs repo funding window for liquidity, a practice that reached its peak in April (see chart), just before Sabadell reopened the covered bond market. The repo window represents something of a standoff for the ECB and the banks. "Eventually, central banks will have to unwind their mortgage asset ownership," says James Garvey, chairman of DCM EMEA for Goldman Sachs. "But while a covered bond at 53bp over can be seen as a good trade in this environment, you cannot run a business funding at 53bp over. The banks will keep going to the ECB."
But while the Spanish covered bond market retreats back into the shadows, the other Iberian market is looking up. In Portugal, Santander Totta priced its debut covered bond, a three-year, 1 billion deal, at 41bp over mid-swaps in the middle of May, just one point above fellow compatriot Millennium BCPs two-year deal the previous month. When Portuguese covered bonds first appeared in 2006, they were tarred with the same brush as Spanish cédulas, and have always been closely linked in the minds of many investors. But the crunch has enabled the two to de-link, to the obvious benefit of the Portuguese market, considering conditions in Spain since last summer. "This shows investors are now differentiating between the two countries," says Robinson at Merrill Lynch. "They are no longer being lumped into the same bracket. Investors are doing enough homework to drill down to the more specific details of covered bond programmes."
The next covered bond to come out of Portugal is expected to come from Banco BPI, after it completed its roadshow in May. The next big Spanish deal is anyones guess.