New Issues: Bank of America in covered bond deal

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Bank of America has become the second US lender successfully to enter the European covered bond markets with the sale of €4bn ($5.35) worth of bonds in its inaugural deal on Wednesday.

The issue priced in line with expectations and was sold in two tranches of five and 10 years, each €2bn in size, which was increased from initial talk of €1bn for each tranche because of demand for more than €7.5bn worth of bonds, said bankers involved.

The arrival of US issuers hugely excited the covered bond market, traditionally dominated by German and Spanish borrowers but that has seen an influx of new issuing countries since HBOS sold the first UK deal in 2003. New countries bring a rise in the volume and diversity of supply for investors and introduce a new set of investors to the instruments as institutions tend only to begin buying the bonds when domestic issuers become active. Covered bonds are secured against pools of either mortgages or public sector loans but are deemed less risky than other mortgage-backed securities because investors have recourse to the issuing bank’s balance sheet.

Washington Mutual became the first US issuer in the market last autumn.

It sold a similarly sized deal and raised expectations that other US mortgage lenders would enter the market.

Wachovia and Countrywide are among favourites to be next but one banker said on Wednesday that, while there were several potential issuers, a flood of deals was unlikely. The BoA deal – sold by Banc of America Securities, ABN Amro and Deutsche Bank – saw its five-year note priced at 2 basis points over mid-swaps and its 10-year at 6bp over.

Each tranche priced about 2bp tighter than the yield that WaMu’s bonds are trading at, which bankers said was due to BoA’s stronger underlying financial strength ratings. However, the pricing was somewhat wider than the yield prevailing on issues from HBOS, the UK’s largest mortgage lender. Bankers insisted this was not due to worries about the US mortgage market.

“There was obvious concern among investors at the roadshow about the US mortgage market, which we were very happy to address,” said Chris Halmy of BoA’s corporate treasury group.

He added that BoA, which announced a €20bn covered bond programme on its roadshow, expected to be a frequent issuer but that it did not have specific deal size or annual issuance volumes planned.

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