LBBW sold a $500m (Eu402m) three year covered bond today (Thursday), match-funding dollar assets in a deal that attracted some $1.2bn of demand and setting an example that other Germans could follow given that euro Pfandbriefe in that part of the curve trade at a negative yield.

Landesbank Baden-Württemberg announced the Reg S transaction yesterday (Wednesday), its first since July 2010. According to a syndicate official at one of leads Citi, LBBW, RBC and UBS, this allowed time to work with accounts and get credit lines in place for the mortgage Pfandbrief.

They then began taking indications of interest at 0300 CET (1000 Hong Kong) and received strong feedback from “the usual suspects”, said the lead syndicate official. Marketing then moved to Europe, with IPTs set at the 30bp over mid-swaps area, and after almost $1bn of IOIs were taken guidance was set at the 27bp area. This was then revised to 25bp-27bp shortly before books were closed at 1130 CET. The re-offer was fixed at 25bp over on the back of a book of around $1.2bn comprising almost 60 accounts.

With there having been no recent three year dollar covered bonds, it was difficult to find useful comparables, noted the lead syndicate official, while a NordLB 2% February 2019 deal issued in October 2013 that was quoted at a z-spread of 22bp was also different because it had 144A documentation.

He said that the 25bp over re-offer was equivalent to the high teens through mid-swaps in euros. He estimated that fair value in euros for three year LBBW paper would be the mid to low 20s through, meaning that the issuer had paid a premium of 5bp-6bp for the dollar issuance. However, he noted that the deal offered a perfect hedge for the assets in the cover pool.

He also highlighted that, with three year swaps at 0.13%-0.14% in euros, a spread of the low 20s through would result in a negative yield for any new issue.

“It’s definitely not that easy to get three year euro funding at those levels at the moment,” he said, “so it definitely makes sense to make use of the dollar market. I guess there will be more Germans looking at this.”

The pricing of 25bp over gave a semi-annual yield of 1.43%.

Final distribution statistics were not available, but the lead syndicate official said that there had been big tickets to Asia and central banks, and a broad mix of other demand: from Nordic and UK banks; asset managers in the UK and Benelux; Swiss banks and private wealth; and some small tickets from within the S-Finanzgruppe.

“After issuing our Eu500m four year in January for the German market,” he said, “we have taken this next step of returning to the dollar market after almost five years with a very successful deal.”