Münchener Hyp sold a Eu500m two year issue today (Monday) that an official at the issuer said was launched to provide investors with a rare opportunity to access short term paper, with syndicate bankers seeing pricing of 20bp through as punchy, but defensible.

Rafael Scholz, Münchener Hyp

The deal is Münchener Hypothekenbank’s third euro benchmark of the year, and the first from a non-peripheral issue to feature a maturity shorter than three years.

Leads Commerzbank, DekaBank, DZ Bank, NordLB and Société Générale built an order book of more than Eu500m and priced the public sector backed Pfandbrief at 20bp through mid-swaps, in line with guidance and initial price thoughts.

Syndicate officials away from the leads said the pricing was tight, but arguably justified in light of factors such as the maturity, general lack of supply, and the tight levels at which the issuer’s deals typically come.

“Obviously it is very tight in terms of pricing,” said one, “but it is a tight trading name and it is a very short dated deal.

“People are seeing this as a cash alternative.”

Another said the pricing was aggressive, but he liked the deal for coming with a rare two year maturity that provides the likes of money market investors with liquidity, and he said that the deal would meet with enough demand to allow tight pricing.

The pricing was tight relative to German agencies, he added, but in line with what was deemed to be an aggressive level on a Eu500m five year deal the issuer sold in September. That was the first euro benchmark since the onset of the crisis to hit sub-Libor pricing territory, coming at 14bp through mid-swaps, although widening thereafter. The pricing on that and now today’s deal are the tightest ever for benchmark covered bonds.

Another syndicate banker earlier this morning said the deal appeared to be struggling and that the market reaction indicated the pricing was viewed as tight, but that this would not really raise eye-brows.

A lead syndicate banker said that the pricing on Münchener Hyp’s five year deal in September was viewed as aggressive but the transaction went well, and that today’s issue was a “ground-breaking performance”.

The deal met with a strong response from domestic accounts and various central banks, he said, with French and Nordic accounts put off by the spread versus government bonds – Münchener Hyp’s deal was coming around 10bp through OATs, he said.

“There was a strong German follow-up with a healthy and good quality order book,” he said, “and people are expecting a Eu500m deal rather than a Eu1bn deal.”

The transaction was initially described as a benchmark before being set as a Eu500m no-grow.

German accounts were allocated 59.6% of the bonds, Asia 16%, Nordics 12%, CEE 7%, Japan 2%, Austria 2%, and others 1.4%. Banks took 45.2%, central banks 33%, funds 19.8%, and others 2%.

The deal offered a very limited new issue concession, added the lead syndicate banker, and was priced off the issuer’s secondary market curve.

“We felt comfortable this level would get interest from investors and offer good value to the issuer,” he said.

Rafael Scholz, head of treasury at Münchener Hypothekenbank, questioned whether the pricing should be seen as punchy.

“This is uncertain territory,” he said, “and where else should it price than versus outstanding bonds? The truth has to lie on the secondary market curve, and we’re lucky to have a lot of bonds outstanding that serve as a reference.”

He said that the issuer chose to go with a two year maturity as this completes its benchmark curve and provides investors with a rare opportunity to access short dated paper.

“We asked ourselves why no other Pfandbrief issuer has sold a two year benchmark this year, or for even longer than that, despite there being a lot of demand and a shortage of investment opportunities,” he said.

“With a pretty low coupon this is in effect new territory and we are offering clients a different product.”

The deal was priced at 99.795 and featured a coupon of 0.125% to yield 0.228%.

A syndicate banker away from the leads said Münchener Hyp’s deal would make sense as a LTRO-prepayment move given cost savings attainable by tapping the public market versus sticking with the ECB’s facility.

Scholz said that it is plain to see that the issuer’s two year benchmark provides cheaper funding than ECB loans under the central bank’s longer term refinancing operation (LTRO), but that replacing LTRO funding was not the motivation for the new issue.

“The first prepayment date is the end of January, so if this were a replacement you would have to have the proceeds on your books for two months.

“I can imagine it being a motivation for some issuers early next year, and our deal will in that sense serve as a useful reference, but for now it is too early to talk about replacing LTRO funding given the carry costs.”