Commerzbank ended weeks of speculation by emerging with a first SME loan-backed structured covered bond today (Thursday), a Eu500m no-grow five year issue that market participants said was well timed and skewed towards senior unsecured in spread terms, but provided the issuer with savings.

The deal was announced yesterday (Wednesday) afternoon when leads Barclays, Commerzbank, Crédit Agricole and UniCredit began taking indications of interest at the mid-50s over area.

The issuer’s structured SME loan-backed programme has been talked about since December, when preliminary ratings brought it out into the public domain, with anticipation mounting after Commerzbank announced a roadshow mandate on 7 January. Divergent views on where the deal should be priced along the covered bond-senior unsecured spectrum are understood to have contributed to the issuer putting off launching a transaction.

A syndicate banker away from the leads said that the pricing looked surprisingly tight, as he would have expected the deal to trade closer to where the bank’s senior unsecured issuance trades.

“The deal had been announced long ago,” he said, “so I’m pretty sure they decided to go for it today only because they had the comfort of knowing that investors were there.

“This is a really specific animal that appeals only to some specific investors.”

Capping the deal at Eu500m helped attract demand, he added.

The leads opened order books on a Eu500m no-grow deal this morning with guidance set at 50bp-55bp over before later revising guidance to the 50bp over area and then fixing the re-offer spread at 47bp over on the back of more than Eu1bn of orders.

The bonds are rated Aa2/AA by Moody’s and Fitch, with analysts pointing out that, because they are issued on a contractual basis only, they are neither CRD nor Ucits compliant and also do not qualify for the ECBC Label.

Market participants were positive about the deal this morning.

A portfolio manager said that, although he usually prefers more “stable” asset classes, it looked attractive.

“I consider the underlying loans not as good as mortgages, but the spread is quite interesting,” he said. “There is a lot of cash in the market. Given the lack of supply, the deal was well timed.”

Bankers were also fairly complimentary of the transaction, saying it was well timed and the pricing well pitched.

“It’s skewed toward senior unsecured,” said a syndicate official away from the leads. “They did the right thing.”

With a new five year senior unsecured Commerzbank issue likely to come at around 70bp-75bp over, according to bankers, the issuer saved 23bp-25bp. A banker who estimated the saving at around 28bp noted that this would translate into Eu7m of savings overall on the Eu500m deal.

“For all the negative talk at conferences there is clearly enough liquidity and the timing is good enough for it to be a right trade,” said another banker.

At the time when the spread on the deal was still at the mid-50s a banker suggested that a 20bp concession was a fair return for exemption from new bail-in rules, plus a rating uplift over affecting senior unsecured debt. Commerzbank is rated A3 negative/A+ stable/A Credit Watch Negative by Moody’s, Fitch and Standard & Poor’s, respectively.

Some bankers were also positive about the future of Commerzbank’s issue and further SME backed covered bond supply.

“I would expect to see good secondary performance,” said one. “This will put a line in the sand to define where it should sit in the senior covered context. It will end up 50% between the two, but maybe squeezed towards covered bonds.”

Another said that he hoped investors do not read across Commerzbank’s issue to any legislative SME covered bonds.

“Statute-based bonds will tick a lot more boxes and are worth a lot more than a 20bp premium,” he said, “particularly in the higher beta markets.”

Several German Pfandbriefe backed by public sector and mortgage assets have come at levels typically almost flat to mid-swaps in the five year part of the curve so far this year.

Deutsche Pfandbriefbank priced a Eu100m three year floating rate mortgage Pfandbrief today. The bonds pay a quarterly coupon of 20bp over three month Euribor, and were priced at par by leads DZ Bank and UniCredit. The deal was launched this morning as a Eu100m minimum deal.

A syndicate official away from the leads said that there is increasing interest in FRNs in light of expectations that interest rates could increase and he had said it would be interesting to see if the issuer would be able to achieve a sizeable transaction.