Commerzbank sold the first deal off a new public sector Pfandbrief programme yesterday (Tuesday), a successful Eu500m five year deal that the German bank’s head of covered bond funding said showed the strengths of the product after the recent volatility in the market.

Leads Crédit Agricole, BNP Paribas, Commerzbank and Deutsche Bank priced the deal at 2bp over mid-swaps after building a book of around Eu1bn following initial price thoughts of the mid-single-digits and guidance of the 3bp area.

The inaugural issue comes after Commerzbank launched the first SME backed covered bond benchmark in February, a structured deal that proved controversial in taking the covered bond market outside its traditional parameters and prompted much debate before and after its launch.

The new public sector programme’s collateral includes loans backed by sovereign-guaranteed export credit agencies (ECAs), which is also a relatively new collateral type in covered bonds.

Rainer Mastenbroek, head of covered bond funding at Commerzbank, said that the roadshow for the new programme proved relatively smooth.

“Although it is a regular Pfandbrief from a legal perspective, it is not an old-style public sector Pfandbrief,” he told The CBR. “We have a higher share of ECA assets in the pool which is a new development for a public sector Pfandbrief. But when we spoke to investors, there was no doubt that this is a real Pfandbrief. Of course, it was something that we had to explain, but investors understood the structure.

“We have our Mittelstandsbank that does this kind of business. So it was easy to get across that we will be using the public sector Pfandbrief to finance our MSB in future, i.e. a core business. And the good thing about these loans is that we have the Euler Hermes coverage which provides us with a 100% guarantee of the Federal Republic of Germany, and that made the explanation pretty simple.”

Mastenbroek said that the outcome showed how the programme had been accepted.

“It was priced as a normal public sector Pfandbrief,” he said. “We are very happy with the pricing and how the transaction went.

“The distribution was also very Pfandbrief-like – we had the most demand from Germany and from banks, which you would expect when you issue a Pfandbrief.”

German accounts took 73% of the bonds and banks 58%. The balance was distributed 13% to France, 4% to the Benelux, 3% to the UK, 3% to Austria and Switzerland, 2% to Nordics, and 2% elsewhere, while central banks took 17%, asset managers 10%, retail 8%, pension funds 5%, and others 2%.

The deal came after a volatile week with an absence of bank issuance, including covered bonds, and Mastenbroek said that this week’s new issuance has demonstrated the strength of the product.

“The transaction is evidence for us that we are on the right track with our long term funding strategy for the core bank via covered bonds,” he said. “Markets were very difficult last week. But this week was a good window of opportunity to issue Pfandbriefe, which was also used by other German issuers.

“If markets hadn’t recovered that quickly, then we would have been also fine with waiting,” he added, “but this way it was better because we had just seen investors and there was a certain momentum, so it was only natural to come with our deal.”

Mastenbroek said that Commerzbank is working on a new mortgage backed covered bond programme.

“There is also a chance that there will be another public sector Pfandbrief, but it now really depends on how we can continue with adding ECA assets to the pool,” he said. “And it has to be said that our funding situation overall continues to be very good. Especially for the Mittelstandsbank, we also have deposits to finance the franchise. Therefore it is always a question of what we want the mix between longer and shorter term funding, i.e. deposits, to look like, also taking into account regulatory considerations.

“The most important thing is that we have now established two out of three instruments that we wanted to put in place in order to be able to issue them when we think it is a good time and we need it from an overall funding perspective.”