LBBW sold a $650m three year Pfandbrief yesterday (Wednesday) that was priced almost flat to an equivalent euro issue, according to LBBW’s Jörg Huber, who said the German issuer opted for dollars in part to circumvent the heightened difficulties of printing a negative yielding euro benchmark.

Landesbank Baden-Württemberg’s new Eurodollar issue is the first benchmark US dollar covered bond from a European issuer to be sold this year, and was launched after an increase in demand for dollar paper and developments in the basis swap made dollar issuance more attractive for euro area issuers.

Leads Goldman Sachs, LBBW, RBC and UBS began taking IOIs for the three year Reg S mortgage Pfandbrief on Tuesday with initial price thoughts of the 55bp over mid-swaps area.

After the London open on Wednesday, the size was then set at $650m (Eu574m) and guidance revised to 53bp plus or minus 2bp, will price within range, before the deal was re-offered at 51bp, with the book closing at over $1.2bn.

“The deal went very well,” said Jörg Huber, head of funding and investor relations at LBBW. “Like every time with a Reg S trade, it was difficult to predict the market – sometimes there is good demand, sometimes it is lighter.

“But we saw in last few days that interest was getting better and felt that the window might open, so we decided to go forward and talk to investors on Tuesday. In the end the result shows we spotted the right window and correctly identified the depth of demand.”

Banks bought 63% of the deal, central banks 18.9%, agencies and official institutions 11.7%, and fund managers 6.4%. Accounts from the Nordics were allocated 26.5%, the UK and Ireland 25.4%, Germany 23.1%, the Middle East and Africa 7.5%, Austria and Switzerland 7.2%, central and eastern Europe 3.5%, Asia 3.1%, the Benelux 2.3%, southern Europe 0.8%, and others 0.6%.

The new issue follows a $500m LBBW issue in February 2015 that the issuer a month later increased by $250m.

“We issue in dollars because we have natural dollar funding needs,” said Huber, “but, of course, as we have access to attractive funding levels in euros, it often makes more sense to take euros and swap them into dollars. Therefore windows have to appear in which we see similar levels achievable, and that was the case here.”

Huber said the spread of 51bp was almost flat to where an equivalent euro-denominated deal would have been priced.

A syndicate official at one of the leads said the spread was equivalent to a euro spread of 3bp through mid-swaps, and estimated an equivalent deal would have been priced at around minus 6bp, noting that LBBW on 3 May priced a Eu750m five year Pfandbrief at minus 5bp.

“That is a very modest price to pay for investor diversification and outright dollar funding,” he said. “You’ve got to say well done to LBBW for seeing the trends of improving pricing levels relative to euros and of strong investor appetite.”

Bankers said the deal offered a new issue premium of around 5bp.

Besides the issuer’s natural need for dollar funding and objective of regularly offering paper for the more dollar-focussed accounts in its investor base, LBBW opted for the dollar market because of the challenges it would have faced in pricing a three year euro-denominated issue in the current negative yield environment, according to Huber.

“With three year euro mid-swaps at minus 11bp yesterday, we would clearly have had to price a three year euro Pfandbrief with a negative yield, and this is quite difficult,” he said. “Maturities up to four years are more or less closed for Pfandbrief issuers.”

On 8 March Berlin Hyp sold the first and to date only negative yielding benchmark covered bond, a Eu500m three year Pfandbrief that had a yield of minus 0.162%.

“Berlin Hyp’s deal was sold in quite outstanding circumstances,” Huber said. “It is doable, but at the time their deal came just a couple of days before ECB decided to lower the deposit rate to minus 40bp – as everyone had expected – and therefore triple-A paper, with a short maturity and more yield than the minus 40bp was something investors were looking for.

“Now I suspect it might be more difficult.”

Huber added that LBBW would also have had to pay up to issue a negative yielding issue.

“Berlin Hyp in the end probably paid more for a three year than they would have for a five or six year,” he said.

LBBW has already this year issued three benchmark euro-denominated covered bonds and one senior unsecured benchmark, a Eu1.25bn three year in January.

Huber said LBBW has been particularly active this year, as with last year, because access to the private placement market has been limited in the low rate environment.

He added that the issuer is ahead of its funding plan for the year, but will continue to monitor the market ahead of potential benchmark issues, depending on the growth of the bank’s business.