NordLB offered a generous spread when it launched the first ever aircraft Pfandbrief yesterday (Tuesday) despite believing it was in a “win-win” situation going into the deal, with more ambitious pricing to be targeted when it returns to the market, according to an official at the bank.

A Eu500m no-grow five year deal marks the inauguration of a fourth German Pfandbrief segment that was made possible by an amendment to the country’s dedicated Pfandbrief legislation in March 2009.

NordLB, Hannover

The transaction was almost entirely bought by domestic accounts, which Thomas Cohrs, head of syndicate and origination, financial institutions and SSAs at NordLB, said was expected.

“It was the traditional Pfandbrief investors who got involved,” he said. “The rating was less relevant than the fact that it is a Pfandbrief with a spread closer to senior unsecured levels.”

Moody’s has provisionally assigned an A2 rating to the aircraft covered bonds, representing a one notch uplift from the issuer rating.

German investors took 95% of the bonds, the Benelux 2% and others 3%. Banks were allocated 47%, asset managers 41%, insurance companies 7%, corporates 2%, and others 3%.

Leads Commerzbank, Deutsche Bank, NordLB, RBS and UniCredit priced the new issue at 55bp over mid-swaps, the tight end of guidance of 55bp-60bp over, on the back of more than Eu1.1bn of orders after less than one hour of bookbuilding. Some several hundred million of indications of interest had been placed on the basis of initial price thoughts of the 60bp over area. The deal was this morning said to have tightened by around 6bp.

Cohrs said that the pricing took into account trading levels for privately placed NordLB senior unsecured bonds and theoretical new issue levels for NordLB benchmark Pfandbriefe backed by traditional assets, such as mortgages or public sector debt.

“We then added a generous premium, which arguably may not have been necessary but we felt was important given the inaugural nature of the transaction,” he said.

Senior unsecured NordLB bonds trade at around 70bp over in the private placement market, added Cohrs, with a benchmark senior deal probably necessitating a spread of more than 100bp over.

“With 55bp we ended up roughly in the middle,” he said. “Pricing on the next deal should be considerably more ambitious.”

The deal was launched promptly after conclusion on Monday of a lengthy roadshow, with market sentiment better yesterday than the preceding days but still subdued.

However, market tone was largely tangential to the timing of NordLB’s deal, according to Cohrs.

“We were in a win-win situation,” he said. “It’s a safe haven product so in a risk averse market you’ll have a situation like the one we had where the deal is mainly bought by traditional Pfandbrief investors, but in a better market you can assume that there would be more investors outside of this camp.”

He noted that NordLB’s aircraft Pfandbrief drew strong demand despite being in the market at the same time as the European Financial Stability Facility (EFSF) with a September 2017 triple-A rated deal that came only 5bp tighter. The EFSF deal was sized at Eu6bn.

NordLB intends to be a regular issuer of aircraft Pfandbriefe, said Cohrs.

“Hopefully we will be in a position to come to market again soon,” he said, “although whether that will be this year or next, I do not know.”

NordLB is the only German bank to have an aircraft Pfandbrief licence from the German financial supervisory authority, Bafin, but others are understood to be working on obtaining the necessary permission to use the funding instrument.

The Association of German Pfandbrief Banks (vdp) welcomed NordLB’s transaction for getting the aircraft Pfandbrief segment off to a positive start.

“We are pleased with this successful debut issue and the opening of an additional segment of the Pfandbrief market that comes with it”, said Jens Tolckmitt, chief executive, vdp. “In times of increasing demand in aircraft finance the aircraft Pfandbrief offers German Pfandbrief banks active in that segment funding at favourable terms.

“At the same time, investors have a further attractive option to diversify their portfolios.”

A banker away from NordLB’s deal was critical of the aircraft Pfandbrief, however, saying that it dilutes the Pfandbrief brand and gives German banks in the aircraft financing business a competitive advantage at taxpayers’ expense because of an implicit government guarantee of Pfandbriefe that should not be extended to non-policy assets such as aircraft financing.

The vdp said that it expects further issuance of aircraft Pfandbriefe within the next months, but that it assumes that only a fraction of the some Eu30bn total aircraft loan portfolio of its members can and will be funded through aircraft Pfandbrief issuance.