Deutsche Bank launched only its third benchmark covered bond yesterday (Wednesday) afternoon, a Eu500m seven year deal that the issuer said performed well in part because of a change to its cover pool. Barclays Bank was also in the market yesterday, with a £700m tap.

Leads Crédit Agricole, Deutsche Bank, Natixis and UniCredit announced the transaction at 1500 CET with initial price thoughts of the high 20s and an aim of executing the following day. Books were officially opened around 1600 CET at guidance of 22bp-25bp over mid-swaps, before the trade was priced at the low end of guidance, at 22bp over – the tightest spread on a euro benchmark covered bond this year.

Deutsche Bank, Frankfurt

“We are very happy with the trade,” said Marco Zimmermann, head of issuance Europe at Deutsche Bank. “It was due to a combination of favourable factors including Deutsche Bank’s strong credit rating, the increased granularity in the cover pool, scarcity value, and a positive market environment.

“All these factors allowed us to source the funds without paying a new issue premium.”

A syndicate official at one of the leads put an outstanding March 2018 issued by Deutsche Bank at 18bp mid at the time of the deals’ announcement.

“We started with a new issue premium of 6bp-7bp,” she said.

She noted that the plan was to start the IoI process and then go out officially on Thursday.

“However, we got strong investor demand and discussed internally that there was no reason to drag it on and wait until today,” she said, adding that investor demand was close to Eu1.5bn before books were officially opened.

Orders were in excess of Eu2bn, with about 100 orders by the time books were closed at 1645 CET.

A syndicate banker away from the leads said that the pricing was “spot on”, coming with a low new issue premium. Relative value considerations were not that relevant to the deal, he suggested, given that the issuer is a rare name in covered bonds.

Another said initial guidance had probably been in the high 20s and only then adjusted downwards to account for the seven year maturity, which he said is not as favoured a maturity among investors as other parts of the curve.

The trade follows two previous Eu1bn seven year Deutsche trades, in June 2009 and March 2011. The cover pool size is currently Eu4bn, with its composition undergoing changes.

“We have decided to move more residential mortgages into our cover pool because we deliberately wanted to increase the granularity of the cover pool, which we did by adding more residential mortgages” said Zimmerman.

“Residential mortgages currently make up more than 50% of our cover pool, and expect that should grow to 70%-75% by the end of 2012, whereas on the other side, the commercial portion has continued to decrease, and is expected to be about 25% to 30% by year-end.”

The cover pool has also grown in size, with a Deutsche report stating that the number of loans had increased from 2,585 in Q4 2010, to 12,234 in Q4 2011 and 16,002 by 15 February 2012.

Zimmermann said he hopes to grow the cover pool from Eu4bn to Eu6bn-Eu6.5bn over the course of the year.

“One reason we did Eu500m was the overall size of the cover pool,” he said. “We are still building it up. And the second reason was to optimise the asset liability management of the cover pool.

“We have the flexibility to issue either Eu1bn or Eu500m deals going forward,” he said.

He added that the issuer was targeting around Eu2bn-Eu3bn in Pfandbrief issuance this year.

“I wouldn’t rule out more issuance this year,” he said, “and I would expect that we will now come to the market more often than we have in the past.”

Zimmermann said the issuer’s plans to more frequently access the market were not connected to it recently joining the Association of German Pfandbrief Banks (vdp).

“We simply felt that being a part of the vdp would allow us to better support the Pfandbrief as a product in the market,” said Zimmermann.

The lead syndicate official said that about 9% of the bonds were bought under the ECB’s covered bond purchase programme (CBPP2).

“I think it was very standard participation,” she said, adding that CBPP2 had little impact.

“That’s the whole point with the Eurosystem – they like to get involved but not have any impact.”

Banks took 46%, funds 25%, insurance companies 12%, central banks 11%, and others 6%. Germany was allocated 64%, the UK 11%, France 5%, Switzerland 5%, Italy 4%, Austria 4%, and others 7%.

The syndicate official noted that the transaction was trading at 17bp in the market today.

Barclays Bank was in the market yesterday with a £700m tap of an outstanding January 2015 floating rate note, drawing about 20 accounts. Sole lead Barclays Capital priced the trade at 135bp over three month Libor, in line with initial guidance.

“It went great,” said a syndicate official at Barclays.

He put the outstanding issue at 136bp/133bp at the time the tap was announced.

Books were officially opened at 0900 London time and closed by around lunch time, according to the syndicate official.

“We sized the issue to meet investor demand,” he said.

The deal had been marketed as a £300m minimum. The syndicate official said that the trade was mostly taken up by asset managers and bank treasuries.