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26 October 2016
Richard Kemmish

Perhaps I’m too easily pleased, perhaps it is a topic too close to my heart, but the news that PKO Bank Hypoteczny successfully launched the first euro denominated covered bond from Poland put a spring in my step this week. Apart from that all important ‘first’ there were several aspects of the trade that bode well for future CEE covered bonds.

The absolute yield of 18 basis points is of course shocking, but most absolute yields nowadays look ridiculous.

What is far more pleasing was the relative yield. Firstly, it was a tight spread over Polish government bonds in euro, about three basis points. Not only is this indicative of the bonds quality, it is also substantially less than the margin that they pay over the government in the domestic market. Some CEE governments have expressed a concern that covered bonds from their country could squeeze out their own borrowing programme. This is a far more valid concern in the finite domestic currency market – where PKO’s wider pricing over governments suggests that they are not substitutes – than it is in the bottomless pit that is the euro rates market, where the pricing is far tighter. The government need not be concerned.
The other pleasing aspect of the pricing was the relative value comparisons that many people made when discussing the bond’s value. Yes, the bond’s priced wide of comparably rated bonds from southern Europe but the important point was that these were the comparisons used. The next trade will come at a narrower spread, the one after that through the spread of established issuers.  The ultimate goal is that covered bonds from the region stop being called ‘CEE covered bonds’ and start being called ‘covered bonds’. 

I haven’t see the distribution list of course but the details that were disclosed, such as the geographic distribution, underline the pricing arguments – it was a pretty traditional distribution for this maturity – slightly higher in asset managers as you would expect for a bond with a positive yield – but generally a very normal order book. In the age old conundrum of EM covered bonds – are you selling EM to covered bond investors or covered bonds to EM investors? – score one to the correct answer.
Even the (unjustified) complaints about the trade – that three pricing iterations in the book build were too many – reinforce just how much the bond was in line with market norms. I’ve heard that complaint raised against some of the finest issuers in the market.
The final, pleasing but hopelessly overlooked feature in all of this is that this was (to my knowledge) the first ever covered bond with conditional pass through language issued in a currency other than the currency of most of the assets. That might sound obscure but it is a significant step forward in covered bond swap technology.

All of which reminds me of Churchill’s famous criticism of Polish soldiers fighting alongside the British in the second world war: there is only one thing wrong with these Polish – there aren’t enough of them.

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