UniCredit Bank AG placed a Eu500m seven year mortgage Pfandbrief issue yesterday (Monday) that was launched on the back of two recent successful Pfandbriefe, but offered a pick-up over secondaries to attract investors, according to a lead syndicate banker and an official at the issuer.

Leads Crédit Agricole, Deutsche Bank, DZ Bank, NordLB and UniCredit priced the deal at 14bp over mid-swaps after having set guidance at 15bp-17bp over and initial price thoughts in the high teens.

Rüdiger Jungkunz, syndicate banker at UniCredit, said initial price thoughts were set in the high teens to take into account where two Pfandbrief transactions were priced last week, namely a MüHyp Eu750m eight year deal priced at 3bp over mid-swaps on Wednesday, and a BayernLB Eu500m public sector 10 year issue priced at 11bp over on Thursday.

“We noticed that those transactions, despite being successful, could not achieve a decent level of oversubscription,” he said, “so we realised that we had to show a new issue premium that attracted investors from the beginning of the process and also allowed a notable secondary market performance, even more as we were launching the third issue in a row from a very tight jurisdiction.

“A specific level of oversubscription provides investors with secondary market performance.”

He said that investor feedback was prompt and positive, with demand approaching Eu500m in the first 30 minutes after initial price thoughts were announced, and Eu1.45bn during the 60 minutes of official bookbuilding.

More than 90 accounts participated in the transaction. German investors were allocated 66%, Asia 13%, the Benelux 10%, Austria 5%, France 4%, and others 2%. Banks took 39%, funds 36%, central banks 16%, insurance 3%, corporates 3%, and others 4%.

Holger Oberfrank, UniCredit

Holger Oberfrank, managing director and head of treasury medium/long term desk at UniCredit Bank AG, told The Covered Bond Report the level of demand that the deal managed to attract exceeded expectations.

“It was the highest subscription achieved by a German issuer for many weeks,” he said.

He said UniCredit was conscious of launching the third German Pfandbrief issue in less than a week.

“That’s why we let the weekend pass after the two previous German issues, and went to market this week offering a slight pick-up over secondaries,” he said.

A syndicate banker away from the leads said yesterday morning that at 14bp over mid-swaps the deal looked “a bit generous” compared with both outstandings and the final pricing of 11bp over mid-swaps of BayernLB last week.

Jungkunz said that the pricing reflected the willingness of the issuer to be not too aggressive, and left room for some performance in the secondary market, where the issue tightened by 2bp, trading at around 12bp over mid-swaps yesterday afternoon.

The deal came with some 8bp of new issue premium over the interpolated secondary curve, said Jungkunz.

“In the past weeks we observed that in the low beta segment, when you are in the single-digit or low teens arena, if you are too aggressive from the beginning, you may not reach the very broad spectrum of investors,” he said.

“Especially in the German market, a segment that is considered as the most expensive curve in the covered bond space, a too tight pricing pushes investors away, makes the deal suffer, and leaves no room for secondary performance. This is the reason why we wanted to allow a bit of new issue premium.”

As with five core issuers last week and Crédit Mutuel CIC yesterday morning, UniCredit targeted the seven to 10 year part of the curve.

The seven year tenor was chosen because it fit the issuer’s maturity profile, but also because of a general steepness in yield curves and the low yield environment, according to Jungkunz.

“The reason why the latest transactions were all in the seven to 10 year segment is that the yield curve is very steep,” he said. “For example, a five year issue would have been priced in the single-digit area without even offering a 1% coupon, which is the minimum for many buy and hold accounts to get involved.

“But then in the seven years we could offer a 1.25% coupon, and from seven to 10 years there is another 40bp more in yield,” he said.

Oberfrank said that UniCredit had planned a mortgage covered bond issue for the first quarter as it had generated enough cover pool assets and wanted to raise funding to refinance the collateral.

“We also had a total of Eu2.5bn of redemptions between January and February, and wanted to offer an opportunity for investors to reinvest that money,” he said.

However, he said that the issuer delayed the issuance because of the negative market developments that followed the Italian elections and the Cyprus crisis.

“Then a window of opportunity opened again last week, and we decided to proceed with the transaction, despite the low yield environment,” he said.

Oberfrank said that UniCredit’s funding plans included the launch of minimum one benchmark Pfandbrief this year, with the possibility of proceeding with another transaction in the second half of the year.