BayernLB attracted over £450m of orders to a rare £250m short five year fixed rate issue today (Thursday) with the help of an attractive spread pick-up over recent supply. With the deal the only benchmark live in FIG markets, bankers said a breather would be positive for the covered bond market.

Bayerische Landesbank announced its intentions to sell a sterling public sector Pfandbrief yesterday (Wednesday), either in the format of a three year floating rate note or as a short five year fixed rate issue, ultimately opting for the latter after discussions with investors.

Leads Barclays, BayernLB and Credit Suisse launched the December 2021 issue this morning with initial price thoughts of the 80bp over Gilts area. The leads announced at 10:30 UK time that the order book had reached almost £300m, with guidance unchanged. The spread was later fixed at 78bp and the size at £250m (Eu288m), with books in excess of £450m.

“This looked like it could have been a tricky deal to execute in some ways, with BayernLB obviously being a rare name in sterling,” said a banker away from the leads. “With that in mind, they’ve done well to get a result like this.”

BayernLB has no public sterling Pfandbriefe outstanding, and the new issue is its first sizeable sterling covered bond since February 2013, when it sold a £200m February 2015 issue. The German bank’s only other public sterling covered bond issuance was in 2007.

Bankers said it was difficult to estimate fair value for the new issue given the lack of sterling-denominated German paper. They saw Deutsche Pfandbriefbank (pbb) December 2019s, the longest dated public issue still outstanding, quoted at around 80bp, bid.

“It’s a very tough one to calculate,” said a syndicate banker away from the leads. “But given the credit differential between BayernLB and pbb, with BayernLB’s covereds rated triple-A and pbb’s Aa1, I’d say this price is fair based on pbb’s curve.”

The spread was nevertheless considered attractive versus those offered by recent sterling trades. The deal is the third fixed rate sterling benchmark since markets opened for the year last week, with both of the previous two also being December 2021s: Royal Bank of Canada priced a £500m issue at 63bp over Gilts on Wednesday of last week, and Commonwealth Bank of Australia priced a £350m issue at 67bp the following day.

“For triple-A rated German paper, it’s an attractive spread,” said a banker away from the deal.

Three sterling FRNs have also hit the market, including a £250m three year for Germany’s Deutsche Pfandbriefbank (pbb) priced at 55bp over three month Libor last Thursday.

Bankers noted that the fixed rate deals had benefitted from higher demand, allowing for larger deals, save for a £1bn three year FRN for Lloyds on Monday. The UK issuer’s deal – the largest sterling covered bond in two years – was deemed an exception as it benefitted from domestic interest and a scarcity of UK paper.

BayernLB’s new issue was the only benchmark deal live in the FIG markets today, a stark contrast to some of the more tightly-packed trading days earlier this week. While issuers have also been active in the senior and subordinated markets, covered bond issuance had been maintained at a steady pace since the markets opened – albeit slower this week than in the three days of primary market activity last week.

“After some very busy days it’s easing off as we go into the end of the week, and as today has been quiet I’d expect tomorrow to be similarly modest,” said a syndicate banker. “If you’re not willing to go out on a Thursday, why go out on the Friday?

“That said, I’d definitely still expect issuance to pick-up again on Monday. After a little touch of softness in some parts of the secondary market, I think this breather will be positive for next week’s business.”