The ECB has cut the size of its primary market CBPP3 orders from 30% to 10%, with an inaugural EUR500m social issue for Deutsche Kreditbank today (Tuesday) the first victim, as bankers blamed disappointing demand on the Eurosystem reduction, even if ESG buyers compensated.

A reduction in the standard size of CBPP3 orders for Eurozone covered bonds on the primary market has been anticipated since the ECB announced it will in October reduce its monthly QE target from EUR30bn to EUR15bn. The ECB had already reduced its typical orders twice this year, from 50% of the issue size to 40% in March, and then from 40% to 30% in April.

Deutsche Kreditbank leads ABN Amro, BayernLB, Commerzbank, Crédit Agricole and DZ launched the EUR500m no-grow 10 year public sector issue with guidance of the mid-swaps minus 2bp area this morning.

Just under two hours later, the leads announced that books were above EUR500m, including EUR50m joint lead manager interest. The spread was subsequently set at minus 3bp, with books “well above” EUR500m, excluding JLMs.

The final book stood at over EUR630m, including EUR50m JLM interest.

Syndicate bankers away from the leads said the result was underwhelming and syndicate bankers at the leads acknowledged that demand was lower than they had hoped for. They attributed this to the “significant” cut in CBPP3 orders.

“They scaled down their primary participation from 30% to 10% this time, so it’s a EUR50m instead of a EUR150m order,” said a lead syndicate banker. “A significant amount is now missing.”

Bankers said Deutsche Kreditbank was “unlucky” to be the first issuer hit. They suggested that the cut was to be effective for all deals that settled in October – today’s is the first such deal, with a settlement date of 2 October. A EUR500m Pfandbrief for Commerzbank that was priced yesterday will settle on Friday (28 September) and is understood to have received an ECB bid in line with the previous 30% standard.

Joost Beaumont, senior fixed income strategist at ABN Amro, said Eurosystem officials had confirmed to him that they have “further adjusted the standard primary market bid size”, and that the main reason for this was to “keep a balance between the primary and secondary market presence in light of the lower APP purchase pace in the fourth quarter of 2018”.

[Updated] The ECB confirmed to The CBR the officials’ comments.

“It will be interesting to see how the ECB proceeds in the next Eurozone trades,” said a syndicate banker, “but we should probably expect their orders for all eligible deals to be around 10% from now on.”

The lead syndicate banker compared today’s result to the EUR500m long four year Pfandbrief for Commerzbank yesterday (Monday), which received around EUR700m of orders. Assuming Commerzbank received a bid of around EUR150m from the Eurosystem, he noted that Deutsche Kreditbank’s deal attracted more non-ECB demand.

“Even if we cannot say it is as highly subscribed as we’d hoped for, especially after the feedback we got on the roadshow, I wouldn’t say DKB struggled,” he added. “The book was very granular – there is a total of 50 accounts in the book, we lost no accounts due to limits, and quality-wise it is pretty good.

“It’s not the best, but it’s still a good outcome.”

The deal follows a five day European roadshow which ended yesterday (Monday).

Syndicate bankers added that the social element of the deal helped Deutsche Kreditbank achieve a better result than it would have been able to with a conventional Pfandbrief, although the leads said it was too early to say what percentage of the book was made up by specialist sustainable investors.

“It would certainly have got less demand if it wasn’t for the social factor,” said one.

The minus 3bp spread is the second-widest offered by a euro benchmark Pfandbrief this year, behind only a EUR500m nine year issue for Deutsche Pfandbriefbank priced at minus 2bp on 22 August.

“If you look at the last benchmark 10 year Pfandbrief, it was priced at minus 6bp in June,” said a lead syndicate banker. “Now four months later we are at minus 3bp, and to be honest, I don’t think we’ll see tight levels like this again for 10 year German paper in the primary market.”

Syndicate bankers said the deal paid a new issue premium of around 4bp, citing Deutsche Kreditbank March 2027s at minus 8bp, mid, pre-announcement. They also cited as comparables 2027-2028 paper from compatriots BayernLB, DZ Hyp, Helaba and MünchenerHyp trading from minus 14bp to minus 11bp.

Only one sizeable green or social public sector covered bond had been issued before today’s deal, a EUR300m issue for Kommunalkredit Austria in July 2017.

The deal is Deutsche Kreditbank’s first benchmark covered bond since September 2015.