Berlin Hyp’s double-A mortgage Pfandbrief ratings proved no obstacle to it achieving the tightest pricing for a benchmark covered bond this year on a Eu1bn five year deal yesterday (Tuesday), with an official at the issuer saying that investors appeared convinced of its credit story.

The deal came on the back of a tender offer completed on 3 May whereby Berlin-Hannoversche Hypothekenbank bought back almost Eu1bn of public sector Pfandbriefe. That exercise was launched as Berlin Hyp took a decision to lower overcollateralisation on its public sector covered bonds towards the legislative minimum, putting their rating in jeopardy, to mitigate costs involved in meeting OC levels for its mortgage Pfandbriefe.

Bodo Winkler

Bodo Winkler, head of investor relations at Berlin Hyp, said that a final decision to approach the market with the new jumbo mortgage Pfandbrief was taken a week ahead of launch.

“We have a maturity in July and we know that July is not good because everyone is on their summer holidays, so we had the idea of coming beforehand, but at first we were not focused on the end of May,” he told The Covered Bond Report. “However, in the two previous weeks there had been quite a move in Bund yields, with the Bund future reaching new record levels, and we had the feeling that this was a situation that can turn in the other direction at any time, which would be unfavourable in terms of spreads and maybe demand.

“And then we also still had quite a lot of attention after our tender offer. We were very transparent in our intentions concerning the buyback of public sector Pfandbriefe, which was not our core business, whereas the mortgage business is, so we thought now let’s come to the market with that positive story.”

Leads Barclays, DZ Bank, HSBC, JP Morgan and Landesbank Berlin had taken indications of interest on Monday afternoon in the low teens over mid-swaps, then went out with guidance of the 10bp area yesterday morning, before fixing the pricing at 9bp over. More than Eu2.2bn of orders from 105 accounts were placed in 45 minutes of bookbuilding from 0900 CET.

The re-offer spread is the tightest of any covered bond benchmark this year and Winkler said that the issuer is very happy with the results of the transaction.

“This was really a great success for the bank and for the work we have done in recent months and years,” he said. “We had lots of meetings in Germany and abroad to tell our story to investors.

“It seems as if we convinced quite a lot that we are really a good credit to invest in.”

German accounts were allocated 68% of the issue, Switzerland and Austria 8%, Scandinavia 8%, Asia 5%, Italy 3%, the Benelux 3%, the UK 2%, the Middle East 2%, and France 1%. Banks took 37%, funds 34%, central banks and agencies 17%, insurance companies 10%, and retail 2%.

Berlin Hyp’s mortgage Pfandbriefe are rated Aa1/AA+, but this did not prevent it gaining substantial international interest and pricing inside the rest of the market.

“We have a situation where the Pfandbriefe are not triple-A rated even if the issuer has a high rating, and we have to explain this as not everybody is so interested in Pfandbriefe if they below triple-A,” said Winkler. “But investors understood that in our case this is a management decision not to have the triple-A rating.

“If you have an A+ on the issuer rating it goes without saying that a triple-A is possible for the mortgage Pfandbriefe, but Berlin Hyp always decided we do not to have it because there are so many requirements and it costs so much money. So we convinced investors that this is an economic decision that is useful for them, too, as it enhances the profitability of the bank.”

A decision to limit the size of the transaction to Eu1bn maximum was flagged well in advance of the deal, said Winkler. The size was nevertheless larger than previous, sub-jumbo Pfandbriefe that Berlin Hyp launched in 2010.

“Especially when it comes to international investors, there are still many that are quite focused on the Eu1bn size and who say that while Eu500m deals are not totally uninteresting they are not as liquid,” said Winkler. “Of course, asset-liability management is always easier with Eu500m deals and the rating agencies have a very big focus on the liquidity side of cover pools these days, but in this particular case Eu1bn suited us.”

Winkler said that the jumbo will definitely be Berlin Hyp’s only benchmark this year and that it was communicated before the deal that it would be the only opportunity for investors to buy Berlin Hyp in the public markets in 2012.