Deutsche Hypo sold a Eu500m five year mortgage issue yesterday (Tuesday), and an official at the issuer told The Covered Bond Report that investors’ resistance to sub-Libor pricing influenced its choice of maturity.

Jürgen Klebe

The no-grow Pfandbrief was priced at 1bp over mid-swaps, the middle of guidance of flat to 2bp over, after nearly Eu600m of orders were gathered from 38 accounts. Commerzbank, DekaBank, Deutsche Bank, Natixis and NordLB lead managed the transaction, which came with a 0.875% coupon.

Jürgen Klebe, deputy head of treasury at Deutsche Hypothekenbank, told The Covered Bond Report that the deal delivered on the issuer’s expectations in terms of size and pricing.

“The order book would have allowed us to price it tighter,” he added, “but we did not want to squeeze the spread and wanted to leave room for secondary market performance.

“An order book of nearly Eu600m orders is completely acceptable.”

A re-offer spread of 1bp over mid-swaps is in line with the issuer’s secondary market curve and targeted private placement levels, said Klebe, with the latter in particular an achievement.

Deutsche Hypo’s deal was the second German benchmark this year, after a Eu625m five year for Aareal Bank on Monday, also priced at 1bp over.

Klebe said that Deutsche Hypo’s deal represented a relatively early foray into the market for the issuer, which anticipates raising some Eu5bn of funding across senior unsecured and covered bond transactions in 2013, most of this via mortgage Pfandbriefe.

The choice of maturity was influenced by insights gleaned from some investor work in the days preceding Deutsche Hypo’s transaction, according to Klebe.

“What we understood investors to be saying, and which we think proved to be a correct reading, is that anything under the zero line gets complicated for them,” he said. “In a low interest rate environment a negative spread is not going to increase your placement possibilities.

“We could have imagined going for a shorter dated deal, but because we couldn’t have been as generous as flat to plus mid-swaps we opted for the maturity that offered pricing closest to flat, and that was five years.”

Deutsche Hypo was in the market on the same day as the European Financial Stability Facility, which priced a Eu6bn seven year at 29bp over, and DNB Boligkreditt, which sold a Eu1.5bn five year covered bond at 13bp over.

“We are very comfortable with our spread in the context of these deals,” said Klebe. “Of course a tighter transaction risks losing momentum when there are two parallel deals offering a bigger spread, but we feel that our deal came out very well.”

Syndicate bankers noted that market conditions have been somewhat softer this week than last, but Klebe said that there is still momentum in the market, as demonstrated by Deutsche Hypo’s deal and the new issues for EFSF and DNB.

Germany and Austria took 77% of the bonds, Asia 10%, France 8%, the Benelux 3%, the UK and Ireland 1%, and Nordics 1%. Banks were allocated 67%, fund managers 15%, central banks 10%, retail and others 8%.