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Big bonds

21 March 2019
Richard Kemmish

With the new issue market so healthy is now the time to start revisiting some old ideas – like trying to generate liquidity in the secondary market?

As far as I can work out we have seen a grand total of 2 covered bond deals of €2bn or above in the last seven years. And one of those only got there via a tap issue.

I get it. There are plenty of reasons not to issue very large bonds any more, not least that no-one needs that much funding in one hit thanks to slow mortgage growth, the need to issue TLAC eligible bonds and the munificence of the ECB’s repo department. Then there are the rating agency models. They have become much more punitive of lumpy repayment profiles. Then there is the execution risk around ultra-large deals: more risk, worse consequences of getting it wrong. 

But then again, all of these factors are receding yet we are stuck in a post-crisis mindset of small is safe. 

The Targeted Long Term Repo Operations of the ECB are now more, well, targeted at those in need, as opposed to being a big trough of lovely cheap liquidity for all. Soft bullet structures predominate, reducing the peskiness of those rating agency refinancing models. And perhaps most importantly of all, with every glowing write-up of a new issue in GlobalCapital the risk of a failed deal is less. This year has seen so many heavily over-subscribed deals despite new issue premia of next to nothing. 

Some of us remember the heady days when a covered bond of €2bn was unremarkable – several in a week was fine - a €3bn deal size was perfectly plausible and the real big hitters -AyT and HypoRE issued €5bn plus deals.

Was that just top of the market braggadocio? Possibly. The identity of those two issuers certainly suggests so.

But let us not forget the benefits of those mega-deals. The secondary market activity was good for future deals – with liquid pricing points new issues were able to price far more accurately – it was good for the market – covered bonds had to fight hard to be accepted as tier 1 liquidity assets, we still need to justify that status. It was also a service for smaller issuers – those without any meaningful pricing references in the market benefited from their rival’s liquid curves.

There was a furore recently about a deal that was upsized after being initially marketed as a ‘no grow’. Some people thought that investors would be put off; they weren’t. There was a time when investors would be pull tickets if bonds were smaller than they anticipated.

Similarly, issuers after the crisis started asking investment banks to only place their bonds with buy and hold investors (then they got annoyed that there was no secondary market activity). Before the crisis I remember discussing how many of the bonds should go into the lead’s secondary desks or the brokers to ensure proper liquidity.  

If investors and issuers start asking for ways to make their bonds properly liquid again maybe the syndicate desks might overcome their fear of big deals and we can go back to being a proper rates market? If it doesn’t happen in the current propitious market conditions, it never will. 

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