Landesbank Baden-Württemberg sold its first euro benchmark in over two-and-a-half years yesterday (Monday), a Eu500m four year benchmark that was priced with a historically low coupon of 0.10% but which nevertheless attracted broad demand, according to an official at the issuer.

The last time LBBW issued a benchmark Pfandbrief was in May 2012, although it launched a Eu500m 15 month covered bond in February 2014 and in November it tapped a June 2018 mortgage Pfandbrief for Eu250m.

“The reason why we were a little absent from the market in the last three years was due to the fact that we decreased our balance sheet, so we were selling assets to get in line with our new capital and business targets,” said Jörg Huber, head of funding and investor relations at LBBW. “That led to us having a lot of cash coming in, meaning that we did not need to refinance so much. For that reason we didn’t need to issue benchmarks, because we still issued Eu4bn-Eu6bn a year in private placement format.

“That balance sheet reduction is now over and so for this year we have said that we envisage tapping the market with probably one or two transactions, and as the markets have been quite receptive at the beginning of the year we said, why not go ahead immediately to see what is possible?”

Leads Commerzbank, ING, Natixis and LBBW went out with initial price thoughts of the mid-swaps minus 14bp area, then set guidance at the minus 15bp area before re-offering the paper at minus 16bp, which a lead syndicate official said equated to a new issue premium of 4bp-5bp. Demand totalled some Eu1.2bn.

Huber said that he was pleased to achieve broad placement of the new issue.

“Certainly there was participation from the ECB with their buying programme, but it was not the pillar of the transaction, and we were very happy with the overall distribution,” he said. “Of course CBPP3 is there, but you cannot just rely on the ECB – you need to have confidence that other market participants will enter the transaction and also support it.

“We were quite confident that we would achieve wide acceptance and we did.”

He also highlighted that non-German distribution was 51%.

Banks took 41.6%, central banks and official institutions 35%, asset managers 16.6%, insurance companies 1.8%, and others 5%. Germany was allocated 49%, Switzerland 13.7%, the Benelux 13.4%, France 7.2%, Asia 6%, the UK and Ireland 2.9%, Austria 2.2%, Nordics 1.6%, and others 4%.

Huber noted that the order book grew quickly, with Eu800m of orders within an hour even excluding the ECB.

The four year maturity was chosen as it reflected the issuer’s collateral, according to Huber.

“We are a very conservative borrower and we choose maturities where we also have the assets on the other side,” he said. “We had in the four year bucket of our cover pool enough assets that could match this transaction.”

Huber said that the decision to price the issue with a 0.10% coupon rather than in line with the standard one eighth coupon steps was taken when it became clear how low the yield would be – less than 12bp. Noting that the coupon on the four year deal was lower than 0.20% paid on LBBW’s 15 month deal in February last year, he said that there is nevertheless still demand for Pfandbriefe at such low yields.

“I heard that just a couple of days ago there was the first ticket in Pfandbriefe traded at a negative yield level with a non-central bank,” he said. “Already last year we saw trades at negative yields, but there the participants were central banks and this year was the first time that a non-central bank was buying Pfandbriefe at negative yields.

“Now there are probably also a lot of investors out there who want to circumvent the fact that they might have to accept negative yields when going into government bonds, so they choose the next safest instrument, which is still the Pfandbrief, and here in theory it would be possible to go further down – although at the moment I very much doubt that we will reach negative yields.”