DG Hypothekenbank priced its first benchmark Pfandbrief in more than six years yesterday (Tuesday), lured back to the market by a combination of investor demand for liquid assets, pricing comparable to private placements, and market acceptance of Eu500m deal sizes, said an official at the issuer.

Patrick Ernst, DG Hyp

Deutsche Genossenschafts-Hypothekenbank, a 100% subsidiary of DZ Bank, last tapped the benchmark market in October 2006 and had since then only sold Pfandbriefe in the private placement market before yesterday pricing a Eu500m no-grow seven year mortgage backed issue, at 3bp over mid-swaps.

Patrick Ernst, head of treasury at DG Hyp, said that three main factors combined to bring the issuer back to the benchmark market.

Increased investor demand for liquid assets to satisfy regulatory requirements is one, he said, with covered bond deals of at least Eu500m providing this liquidity because of their size and eligibility for iBoxx indices.

“So we first had investors approaching us and saying that they are looking at this segment,” said Ernst, “and then we also observed changes in pricing, namely that investors are prepared to pay the price for a benchmark issue, whereas in the past private placement levels were considerably cheaper.”

A third factor, he said, was the greater flexibility around deal size as a result of the market acceptance of sub-jumbo deals.

“Deals of Eu1bn or more have always been quite challenging from an asset-liability management point of view,” said Ernst, “and also because of tighter requirements in the Pfandbrief Act.

“By now it is accepted that Eu500m deals also provide for good liquidity, and we feel that this is a deal size we can manage well, so that in combination with the other factors led us to decide to show ourselves in benchmark format again.”

Yesterday’s deal is the culmination of the issuer’s thinking about and preparations for a re-entry into the benchmark market and Ernst said that the issuer is very satisfied with the transaction.

“To get more than Eu1bn of orders within 60 minutes of bookbuilding is a great response after having been absent for a good six-and-a-half years,” he said, “and we are happy with the pricing, which we also think is fair for investors.”

Leads BayernLB, DZ Bank, NordLB, UniCredit and WGZ Bank went out with indications of interest of the 5bp over area and then set guidance at the 4bp over area before fixing the re-offer spread at 3bp over. The final order book stood at Eu1.1bn.

A syndicate official on the deal said that recently sold Pfandbrief issues provided the main pricing input given that they, like DG Hyp’s, are rated triple-A, and that pricing in the low single digits was the aim.

“It was a successful relaunch,” he said, “with few limited orders in the book.”

Coming with a seven year maturity, the deal is the longest dated benchmark Pfandbrief to have hit the market so far this year, after five year issues for Aareal Bank, Deutsche Hypothekenbank and Deutsche Kreditbank last week.

Ernst said that the composition of the collateral provided the first “impulse” for the seven year maturity, but that the issuer also took into account investors’ search for yield in the prevailing low interest rate environment.

At 1.375%, the coupon on DG Hyp’s deal is the largest for any new Pfandbrief issue this year. Aareal’s and Deutsche Hyp’s transactions each came with a 0.875% coupon while DKB’s featured a 1% coupon.

Looking ahead, Ernst said DG Hyp envisages selling one to two benchmark Pfandbriefe a year. These will be mortgage backed only, following the issuer’s exit from the public sector business since 2008, although DG Hyp still maintains a portfolio and cover pool of public sector assets.

“Our focus now is on commercial real estate lending in Germany, and this transaction will not be a one-off,” he said.

German accounts took the bulk of the bonds, which fulfilled the issuer’s goal of having a high share of domestic investors involved, according to Ernst, with participation from central banks a pleasing aspect of the breakdown by investor type.

Germany was allocated 70%, Asia 11%, the Nordics 6%, the UK 2%, the Benelux 8%, Italy 1%, and others 2%. Banks bought 57%, central banks 11%, asset managers 25%, insurance companies 5%, and others 2%.

Sixty-two accounts were in the order book.