Münchener Hyp took a tough yet measured approach to setting the level on what was its first sub-Eu1bn benchmark Pfandbrief yesterday (Monday), a treasury official at the issuer told The Covered Bond Report, and given aggressive sub-Euribor pricing is pleased with an oversubscribed deal.

Münchener Hypothekenbank sold a Eu500m maximum five year public sector Pfandbrief at 14bp through mid-swaps, which is thought to be the tightest new issue spread ever for a euro benchmark covered bond, beating 10bp through mid-swap pricing for LBBW two year and HSH Nordbank three year public sector Pfandbriefe from March and June 2007, respectively. Hypothekenbank in Essen, later taken over by Eurohypo, in September 2006 tapped a September 2008 Pfandbrief at 13bp through mid-swaps.

Claudia Bärdges-Koch, deputy head of treasury at Münchener Hypothekenbank, said that the issuer was encouraged to come to market again in light of a “massive” imbalance between supply and demand, and that sub-Euribor secondary market levels for some of the issuer’s deals put pricing with a negative spread on the table.

Claudia Bärdges-Koch

A Eu1bn 10 year mortgage Pfandbrief that was launched at the end of May is trading at around 1bp through mid-swaps, she said, and January 2016s at around 21bp through.

“With secondary market spreads so deep in minus territory one has to wonder whether it’s possible to price a new issue through Euribor,” she said.

Discussions with investors yielded a range of reactions, according to Bärdges-Koch, including the view that “quality has its price” and that the level was too rich.

“You have to understand that, too”, she said. “We knew we were being tough on pricing, but still measured, and the goal was never to have an inflated order book.

“Investors know that Münchener Hyp comes tight, and our bonds have never disappointed.”

Other factors driving demand, she added, included the pick-up over Bunds (46.4bp over the April 2017 Obl) and government agency Kreditanstalt für Wiederaufbau (KfW), and a desire on the part of investors not to be underweight German Pfandbriefe.

“Investors say they like and feel comfortable with our credit,” said Bärdges-Koch.

More than 80% of the issuer’s public sector cover pool comprises German assets, she noted, and a further 7% is made up of Austrian and Swiss assets.

Leads BayernLB, Credit Suisse, DZ Bank, Goldman Sachs and HSBC built an order book of nearly Eu550m for the deal on the basis of guidance of 13bp-15bp through mid-swaps. The bonds are said to be at around re-offer today (Tuesday).

“We are happy with an oversubscribed deal,” said Bärdges-Koch. “We knew that the tight pricing would make it a precision landing.

“It shocked one or the other market participant, but we were aware it could make that impression.”

Ed Markham, syndicate, Goldman Sachs, said that the deal was well-placed, with Münchener Hyp typically a very sought after credit.

He said that a lack of recent public sector Pfandbrief supply and outstandings, combined with the “deep sub-Libor figure”, meant that the leads decided to go out with a relatively broad spread range to begin, with initial price thoughts of the low double digits through mid-swaps generating a positive response among investors.

“And with the size capped at Eu500m due to collateral availability, we knew the deal was likely to achieve a tight spread relative to outstanding comparables,” he added, “so we were able to revise to 13bp-15bp through.

“It was the right decision to explore the 15 number, but it was also sensible to go with 14bp through as the final spread and leave something on the table for investors.”

The deal is Münchener Hyp’s second euro benchmark this year, but its first ever for less than the jumbo Eu1bn size, due to limited collateral availability.

Notwithstanding the specific reason for the sub-Eu1bn deal size, Bärdges-Koch said that Münchener Hyp may turn to smaller deals again.

“This isn’t the beginning of the end for Münchener Hyp Jumbos,” she said, “but going forward there may be more of a mix of benchmarks and Jumbos to help us manage things more finely.”

Rafael Scholz, treasurer at Münchener Hyp, who was not directly involved in yesterday’s deal, applauded the execution.

“It isn’t just me running the show and the success of our deal was helped by the strengh of our treasury team,” he said. “My colleague Claudia and the lead managers did a great job.”

Forty-five accounts participated in the deal. German accounts took 65.3% of the bonds, France 10.5%, Switzerland 6.3%, Austria 4.3%, Luxembourg 4%, Denmark 3%, Japan 2%, central and eastern Europe 2%, Cyprus 1%, the UK 0.6%, and others 1%, according to the issuer. Asset managers were allocated 36.3%, banks 35.7%, central banks 20%, and insurance companies 8%.