Canadian Imperial Bank of Commerce sold the first negative yielding benchmark covered bond from outside the Eurozone yesterday (Monday), and CIBC’s Wojtek Niebrzydowski said the issuer had been open to the eventuality given encouraging feedback and its preference for shorter dated funding.

The Eu1.25bn six year issue for Canadian Imperial Bank of Commerce (CIBC) was only the second negative yielding benchmark covered bond overall, following a Eu500m three year Pfandbrief for Berlin Hyp in March. Berlin Hyp’s deal was seen as a success after attracting around Eu1.5bn of orders, but other issuers were nevertheless slow to follow the German issuer’s lead.

Niebrzydowski – vice president, treasury, at CIBC – said the Canadian issuer had not been explicitly planning to launch a negative yielding issue.

“If that is what we had wanted to do, we would have tried for fives,” he said. “But given that we like to maintain a friendly face for investors, without the certainty of where those levels would end up, we opted for a six.”

Niebrzydowski said CIBC did not launch a seven year deal, which would have been priced with a positive yield, as the bank prefers shorter dated issuance, with the weighted-average duration of residential mortgage assets in its cover pool being 3.5 years.

“We were thinking this may end up being on either side of the zero by a small margin, anticipating moves in the swap market,” he added. “We were of course prepared that it may end up slightly negative and were hoping that nevertheless it would generate sufficient demand.”

Leads CIBC, Commerzbank, Danske and HSBC launched the six year issue with initial price thoughts of the 10bp over mid-swaps area, before guidance was set at the 7bp area, plus or minus 1bp will price within range, on the back of over Eu2bn of orders. The deal was then re-offered at 6bp, with the book closing in excess of Eu2.5bn pre-reconciliation, before the size was set at Eu1.25bn (C$1.79bn).

Bankers said during the execution process that the deal was likely to be priced with a marginally positive yield, but a banker at one of the leads today (Tuesday) noted that after the spread was fixed at 6bp yields moved lower, taking the deal into negative territory. The deal was ultimately priced at 100.054 with a zero coupon to yield minus 0.009%.

“It’s a very good outcome, and we are quite satisfied,” said Niebrzydowski. “It is obviously encouraging to know that in this environment there is actually demand for slightly negative yields outside of Germany.”

Niebrzydowski added that the spread of 6bp was roughly comparable to where an equivalent US dollar transaction would have been priced, but noted that US dollar covered bond issuance is limited to shorter dated maturities.

Around 90 accounts were in the final order book, with asset managers allocated 42% of the deal, banks 33%, central banks and official institutions 19%, and pension funds and insurance companies 6%. Accounts in Germany and Austria took 47%, the UK and Ireland 15%, the Nordics 11%, Asia 8%, France 7%, the Benelux 6%, Switzerland 2%, and others 4%. Being a non-Eurozone benchmark, the issue is not eligible for CBPP3.

Syndicate officials at and away from the leads said it was particularly notable that a large share of the deal had gone to bank treasuries, in spite of the yield, and suggested this was due to the deal still looking attractive on a relative value basis.

“Having taken this kind of demand at a negative yield, the deal held together remarkably well,” added a banker at one of the leads. “It’s the first non-Eurozone negative yielding benchmark, the first zero coupon Canadian benchmark, the first non-EU deal since the Brexit vote, and the first Canadian six year.

“It’s a first in many ways.”

A syndicate official away from the leads, however, questioned whether the deal represented such a significant landmark, as the yield was only very marginally negative.

“To me, this is basically a zero yield,” he said. “That said, it is still a very impressive result.

“We are breaking new ground with every deal.”

Following Berlin Hyp’s negative yielding deal in March, some issuers cited difficulties in attempting to print a negative yielding benchmark, preferring instead to launch longer dated deals or opt for currencies other than euros, or to look at alternative funding options such as TLTRO II for shorter dated funding.

Deutsche Hypo then, last Friday, launched a Eu250m tap of a February 2023 issue that attracted over Eu1.3bn of orders while offering a yield of minus 0.0771%.

Niebrzydowski said CIBC had been confident to go ahead with the deal given feedback from investors and syndicates.

“We do a fair amount of investor work, and we like to think we have some appreciation of what investors may be looking for in this environment, while at the same time we obviously rely on the recommendations from the syndicate,” he said. “Obviously there is no certainty, but you assess your chances for success and decide whether it is worthwhile.”