Deutsche Pfandbriefbank is exploring investor appetite for a sterling covered bond that an official at the bank said could efficiently meet sterling funding needs, with syndicate officials noting the issuer would be paying up versus euros but that the UK FLS may ease market access.

The issuer has mandated Barclays and UBS for a sterling covered bond roadshow that is understood to have been extended to take in two days in London this week, with a subsequent deal flagged as a possibility, depending on investor feedback.

The issuer is said to be interested in launching a deal on Thursday, although a syndicate official away from the leads said that with Bank of England and ECB meetings that day it was not obvious this is a “viable option”.

Bolton Gate Retail Park: one of the UK commercial properties pbb has helped finance

A debt investor relations official at pbb told The Covered Bond Report that sterling is an important currency for pbb as it also does business in the UK and that issuing directly in sterling could be more efficient than swapping euro proceeds.

“A deal could also help expand and diversify our investor base,” he added. “German investors are unlikely to participate in a sterling deal but for UK investors it could represent an opportunity.”

UK and non-UK sterling covered bonds have continued to perform over the past month, according to UBS trading and sales, with UK names bid-only on the back of expectations of scare supply and tightening some 25bp-30bp. Foreign paper has also performed strongly, noted the bank, which should encourage international issuers to tap the market after deals from Commonwealth Bank of Australia and National Australia Bank comprised the only supply in the third quarter.

A syndicate banker away from the leads said that the issuer would have to pay up considerably, at least 30bp-40bp, compared with where it would price in euros, with UK accounts needing a premium over UK and Australian paper.

He said that this was evident from senior unsecured levels, with pbb at the beginning of September having sold a Eu500m three year issue (its debut) at 195bp over mid-swaps while Commonwealth Bank of Australia re-offered a Eu750m three year floating rate note at 45bp over three month Euribor.

“So if they need the sterling funding then fine,” said the syndicate official, “but otherwise it would seem very expensive compared to where they can fund in euros. It will be interesting to see, in any case.”

Another syndicate official away from the leads said that while pbb would have been seen as unlikely candidate among other German issuers to test the sterling market, the bank is to be applauded for the way it has tackled the project, by publicly announcing a roadshow and flagging the possibility of a subsequent deal.

“I have nothing but admiration,” he said. “In terms of the logistical approach, fair play to them.

“I’m not sure they’ll get a deal done, and I don’t think they’re sure either, but they’ve given themselves every chance, so hats off to them.”

The timing of the project was good, he said, coming after spreads in euros had drifted some 10bp wider and the introduction of the UK Funding for Lending Scheme (FLS) has lowered expectations of domestic sterling supply for the rest of the year, with a concomitant potential shift in accounts’ perspectives on foreign supply.

“The whole paradigm of geographies is open to having a look from an investor point of view,” he said, adding that accounts may be willing to look at jurisdictions that previously were too expensive compared with UK paper.

Pricing levels were in his mind secondary to questions about whether investors would have credit lines, or the appetite to establish these, he said.

Any deal will not be the first time a member of the HRE group has tapped the sterling market, with Depfa ACS Bank having sold sterling denominated Irish covered bonds in 2004.