DG Hyp and WL Bank have agreed key details of a merger that will create the largest Pfandbriefe issuer, under the name DZ Hyp. The merger is expected to boost liquidity in the banks’ bonds but have only a limited spread impact, although an analyst noted tightening potential in WL’s longest outstanding.

Negotiations to merge the cooperative real estate banks WL Bank (Westfälische Landschaft Bodenkreditbank) and DG Hypothekenbank were announced in March. The two Pfandbrief issuers are both members of the DZ Bank Group, following a merger last year of their parents, DZ Bank and WGZ Bank.

On Wednesday, the banks announced that the key features of the merger had been agreed and approved in a joint memorandum of understanding.

The banks said in a joint statement that WL Bank will be dissolved and all its assets and liabilities together with all its rights and obligations will be transferred without liquidation to DG Hyp, and announced the new bank will operate under the name DZ Hyp.

The new entity will become Germany’s largest Pfandbrief issuer by volume, according to the banks.

“As a result, the Pfandbriefe of DZ Hyp might benefit from increased liquidity,” said Joost Beaumont, senior fixed income strategist at ABN Amro, “not only because of the large number of benchmarks outstanding, but it might well be that the issuer’s new deals will have larger issue sizes, which supports liquidity as well.”

As of the end of the first quarter, the two issuers had a combined Eu45.266bn Pfandbriefe outstanding – WL Bank with Eu16.144bn mortgage Pfandbriefe and Eu10.083bn public sector Pfandbriefe, and DG Hyp with Eu11.034bn mortgage Pfandbriefe and Eu8.005bn public sector Pfandbriefe.

Analysts said the merger is likely to have only a limited impact on the credit quality and spreads of the issuers’ Pfandbriefe.

However, Franz Rudolf, head of financials credit research at UniCredit, yesterday (Thursday) noted that WL Bank January 2030s looked cheap, and suggested they will benefit from the status of DZ Hyp as the biggest Pfandbrief issuer. The deal was priced at minus 1bp in January 2015 and was seen trading at around minus 6bp, mid, yesterday – some 5bp wider than extrapolated fair value based on the issuers’ curves, according to Rudolf.

“This will lead to increased attention among international investors and the interest of benchmark-tracking investors,” he said. “We thus see up to 5bp tightening potential for the WL Bank January 2030s under relative value aspects.”

A decision on the merger will be taken by mid-2018 by resolution of the annual general meetings of DG Hyp and WL Bank, with the closing date expected to be effective retroactively as of 1 January 2018.