Kommunalkredit issued an inaugural social public sector covered bond today (Tuesday), the Eu300m four year issue exceeding expectations by attracting Eu530m of orders in spite of the deal’s Baa2/A rating and the issuer’s backstory, albeit with a spread some 28bp back of the widest Austrian comparables.

The deal is Kommunalkredit’s first public covered bond since a demerger in autumn 2015 that split the bank – an infrastructure finance specialist – into the going concern entity issuing the new bond and wind-down entity KA Finanz, with covered bond liabilities divided between the two. The last Kommunalkredit benchmark covered bond came in February 2014.

The new issue follows a European roadshow that ended on 22 June, with the issuer and its leads carrying out further investor work last week.

Leads Commerzbank, Deutsche Bank, ING and RBI launched the Eu300m four year issue this morning with guidance of the low 40s over mid-swaps area. Guidance was later revised to the 40bp area on the back of over Eu350m of orders, excluding joint lead manager interest.

The spread was later fixed at 38bp with the final book at around Eu530m, including joint lead manager interest.

“If you would have asked me beforehand where this book would end up, I’d have guessed around Eu450m,” said a syndicate banker at one of the leads. “We’re really pleased to get Eu530m.

“This was not the most straightforward sell, as a sub-benchmark, non-triple-A trade from Austria – which is still a difficult jurisdiction for some investors – while also being affected by some legacy issues. All in all, it’s a good result.”

Bankers away from the leads agreed.

“Given the size, the complicated story of KA and the triple-B rating, demand was always going to be relatively modest,” said one. “They can be pleased with this outcome.”

The lead syndicate banker said around a quarter of the deal had been allocated to specialist sustainable investors. He added that the deal benefitted from a strong domestic bid, but also from large orders from the Nordics and Germany.

Kommunalkredit’s covered bonds are rated Baa2/A (Moody’s/S&P), and bankers said it is therefore difficult to calculate fair value for the new issue, given a lack of similarly-rated Austrian paper and with the deal being Kommunalkredit’s first since the 2015 demerger.

Price discovery was made even more challenging, they added, because the deal is the first SRI covered bond from Austria and the first sustainable covered bond backed by public sector assets.

“Finding where this deal belongs in terms of price has been the hardest part in terms of fact-finding,” said one. “There are not many markets that offer a range from triple-A to triple-B paper, and it is unprecedented that an Austrian issuer would come to the market with a split triple-B/single-A covered bond rating.

“You could, for example, look at how UniCredit trades versus Carige in Italy, which would also then be triple-A versus triple-B, but Italy and Austria have completely different stories.”

Bankers estimated that the deal offered a pick-up of around 38bp versus the curves of most Austrian issuers, seeing triple-A rated 2021 paper trading around flat, mid, and around 28bp versus Aa3 Hypo Tirol February 2021s – the widest Austrian benchmark in the four year part of the curve, trading at around 10bp.

“In the beginning, I did not think it would require this much of a pick-up versus standard Austrian triple-A paper,” said a syndicate banker away from the leads. “But they did a lot of work on the investor side, and this seems to be the price on which all sides agreed.”

The lead syndicate banker estimated that a new four year covered bond from a triple-A Austrian issuer would be priced at around 15bp.

“Therefore, I’d put the premium at around 20bp-25bp,” he said.

The deal was issued under Kommunalkredit’s new social covered bond framework, with a commitment to use the proceeds of the bond to finance existing or new social infrastructure projects, focusing on education, healthcare and social housing.

This “use-of-proceeds” approach is similar to that adopted by Caja Rural de Navarra, which issued an inaugural Eu500m sustainable cédulas in November 2016, and is typical of wider green and social bonds. All other sustainable covered bonds issued to date have a commitment linking the bond to green or socially-orientated collateral.