Aareal Bank opened benchmark Pfandbrief supply for 2012 yesterday (Monday) with a comfortably oversubscribed Eu500m four year deal that an official at the issuer said represented a result in line with its “upper range of expectations”.

Tobias Engel

Leads BNP Paribas, Commerzbank, DZ Bank, LBBW and WestLB gathered around Eu900m of orders for the issue and priced it at 58bp over mid-swaps, the tight end of guidance of the 60bp over area.

Tobias Engel, director, treasury, head of capital markets at Aareal Bank, said that the outcome was a very positive surprise.

“That the deal was received so positively out of all the possible results is the upper range of expectations,” he said. “The order book, at around Eu900m, was very clearly oversubscribed given the difficult times the market is going through.”

Reflecting worsening conditions over the course of last year, the pricing of 58bp over on yesterday’s deal compares with a re-offer spread of 35bp over for a Eu500m five year deal that Aareal sold in June 2011.

A syndicate official away from the leads said that the 2016 issue was trading in the 50s and put the new issue premium at around 10bp, while a syndicate official on Aareal’s transaction identified the new issue concession as being around 12bp.

Engel said that this is a top-up that an issuer pays “with a heavy heart”, but one that is in line with the market, although at the lower end of the range of premiums paid so far.

“If you want to show yourself in the market with a good issue then it is difficult to act against the current market reality,” he said.

Derry Hubbard, head of FIG syndicate at BNP Paribas, said that the transaction was strong.

“It’s positive to see not only national champions but smaller issuers also able to fund themselves effectively and at attractive levels,” he added.

He said that investors are tending to assess new issue levels on the basis of how they stack up with what they consider to be fair value, and that 60bp over area seemed to a spread that “got people excited”.

“We predominantly looked at outstanding Aareal issues, even if there is a fairly inactive picture in secondaries,” he said.

A June 2016 and a February 2015 issue served as the main reference points, he said, with the former trading in the low to mid 50s mid-market, and the latter in the low 40s mid.

The deal is the first German Pfandbrief benchmark since the end of September 2011, when Deutsche Pfandbriefbank sold a Eu500m five year at 68bp over, and brings the number of jurisdictions involved in benchmark supply so far in 2012 to seven.

Engel said that the issuer decided to tap the market because it felt there was a good opportunity and that being the first German issuer to tap the market was an unintended by-product of this move.

“Reopening the market is not something that is normally associated with Aareal, but it just happened that way,” he said. “We had for some time the aim to show ourselves on the benchmark market in January and after seeing how the market was closed for several weeks last year we felt that today was a good day to go ahead with a deal.”

Aareal’s transaction is also the first Pfandbrief since the German government proposed a second financial market stabilisation law that would provide for government guaranteed Pfandbriefe.

Engel said that the issuer did not consider seeking such a guarantee.

“We see it as unnecessary, for us as an issuer and for the Pfandbrief,” he said. “Germany has such a strong legal framework for Pfandbriefe that a government guarantee does not make sense.”

The transaction was driven by domestic investors, which took 81% of the bonds.

Hubbard said that the three to five year maturity range was the “sweet spot” for many German bank ALM accounts, which are also moving away from senior unsecured bank debt in some jurisdictions and not very active in the supranational, sovereign and agency market unless the issuers are domestic.

He added that new rules that lower from Eu1bn to Eu500m the cut-off point for eligibility for inclusion in the iBoxx euro covered bond index run by Markit did not have a noticeable impact on Aareal’s deal.

“The iBoxx is for beta tracking asset managers, and the change was not something that had a significant impact on this transaction,” he said.

After German investors, Asian accounts took 4%, Austria and Switzerland also 4%, Italy 3%, France 2%, and others 6%. Banks were allocated 46%, central banks 26%, funds 23%, agencies 3%, and others 2%.