Leads Barclays Capital, Citigroup, Natixis and Santander received orders of €8.25bn from over 275 accounts for the issuer’s first trade since last May.
The trade took many market participants by surprise as Spanish banks took full advantage of the first LTRO, a second ECB tender is due this month, and Santander had said on Tuesday, in reporting its results, that it had no need to access the wholesale markets in 2012.
“The LTRO gives issuers the option for cheaper funding, but sometimes cheaper doesn’t always mean better,” said Torsten Elling, head of covered bonds syndicate and trading at Barclays Capital in London. “A successful primary market trade like this can provide credibility for an issuer that can’t easily be measured in basis points alone.”
Santander’s previous covered bond was not a success, and marked the last publically syndicated Cédulas of 2011. At the end of last year it undertook a poorly received asset-liability management (ALM) exercise, and syndicate bankers said the generous guidance was designed to ensure a successful return to the market.
Leads opened books with guidance of the 230bp over mid-swaps area without taking indications of interest, and priced a 3.25% €2bn trade at 210bp.
“Leads didn’t think it was the right price, and neither did the issuer,” said a syndicate banker away from the trade. “But they had done a terrible ALM trade at the end of last year and needed to make sure that what they put out there was a success.”
Another said he put fair value at 225bp on Monday, and 215bp on Wednesday after a 15bp rally. Santander’s 2015s were bid at 230bp on Wednesday morning, he added, but the bid offer spread was as wide as 30bp and not an appropriate comparison.
Elling agreed that in order to reopen the market the price guidance was generous from the outset, but said that the final spread of 210bp was more or less fair value compared with where any other transaction would need to be priced to come to market.
“Starting at 230bp also provided more momentum than starting at 215bp, so it was the right decision from the issuer,” he said, adding that price sensitivity had been minimal. “We lost only a handful of accounts in tightening in 20bp, and that was not related to the price revision.”
Paucity of paper
Syndicate bankers away from the deal said they had been suggesting a Spanish trade for weeks, and Elling said several factors conspired to heighten demand.
“There had been no Cédulas since May of last year, the purchase programme is behind schedule in how much it aims to buy, and trading desks are unable to acquire Spanish covered bonds in the secondary market so there was a lack of inventory,” he said. “In addition the LTRO has provided bank treasuries with cheap cash.”
A syndicate official away from the trade said that the paucity of three year paper from any jurisdiction had played a key role in the trade’s success.
“Through all the FI issuance, and all the covered bond issuance since the start of the year this is the first three year bullet trade,” he said. “There have been a couple of three and a half year deals but not a single bullet three year, and the market was screaming for one.”
Issuers have avoided clashing with the LTRO maturity, leaving investors increasingly starved of short dated supply.
“It was perfect for traditional investors desperate for three year trade assets and perfect for banks with LTRO funding to put to work,” he said. “You borrow at 1%, buy Santander at 3.25% and lock in 2.25%, no wonder it was the biggest order book ever.”
Everyone for a carry out?
With €6bn of residual demand and a purchase programme still lagging its target average, syndicate officials expected other trades to follow.
One syndicate banker suggested that though BBVA could be a candidate to follow, it lacked the adequate collateral. Others suggested non-Eurozone names were more likely.
“Eurozone issuers might not come in three years as it builds up too much of a maturity cliff against their LTRO funding, but I don’t see why Nordics and UK issuers wouldn’t take advantage of investors’ need for matched three year funding,” said one.
Another said that DCM bankers were eager to bring follow on trades, but given the coordination between Spanish issuers last year he urged caution.
“Santander tried to follow BBVA twice in 2011, and even price a five year at the same level as BBVA’s three year, and both times they screwed up,” he said. “We don’t want Spain falling over itself, and though the market has rallied I’d suggest other issuers choose a longer maturity.”
A four or five year transaction could go equally as well, he added, and the second LTRO would provide all the three year funding an issuer could want.
“The three years was an obvious trade, but four years is possible as people are willing to do a carry trade from three to four,” he said, adding that a four year deal from Santander would have offered a more attractive spread versus Bonos.
A longer maturity would also raise the chances of a 4% coupon, with Santander’s 3.25% clearly appealing to real money investors, who took around half the trade.
Germany, Austria and Switzerland took 34% of the deal, Spain 27%, UK/Ireland 15%, France 8%, Benelux 4%, Nordics 4%, Italy 3%, Portugal 1% and others 4%.
Fund managers took 42%, banks 34%, insurance and pension funds 14%, central banks and agencies 9%, and others 1%.