Berlin Hyp won plaudits for the execution of a three year Pfandbrief at a yield of minus 0.588% today (Tuesday), which it was able to size at its maximum EUR1bn. Despite the yield being well below the ECB deposit rate, the pricing was said to have satisfied certain bank investor targets.

After the mandate was announced yesterday (Monday) afternoon, leads BayernLB, Commerzbank, Crédit Agricole, JP Morgan and UniCredit went out with guidance of mid-swaps flat to minus 2bp, will price in range (WPIR). After a little over half an hour they reported books above EUR600m – the minimum targeted size – and then moved straight to the re-offer of minus 2bp on the back of books above EUR1bn after around an hour and 15 minutes. The size was set at the issuer’s maximum of EUR1bn after around an hour and 45 minutes and the final book was above EUR1.1bn.

“The deal went fantastically well,” said a syndicate banker away from the leads. “It was quite a bold move. Kudos to all involved.”

The decision to go out with clear WPIR guidance was applauded, given that the yield is by far the most negative of any covered bond and the first in the asset class below the ECB deposit rate of minus 0.40% – as well as the deal reopening the market after a summer holiday season during which markets have moved sharply. A lead syndicate banker said the pricing process had been designed to be as consensual as possible for investors.

“It was a relatively straightforward process,” he added, “although it is always easier to say that after execution. I would not say that we had a strong certainty regarding the outcome, but the syndicate and issuer had a strong conviction that a deal was on the table, although it could be EUR500m, EUR750m or EUR1bn.”

Bankers at and away from the leads put fair value at mid-swaps minus 5bp, with minus 2bp re-offer implying a new issue premium of 3bp.

However, with the deeply negative yielding issue expected to rely on demand from LCR-driven bank buyers, a key consideration was what the pricing would be equivalent to on an asset-swapped basis, said bankers. The lead banker said secondary activity and investor feedback had indicated that investors would be receptive to a positive spread versus three month Euribor and a double-digit spread versus Eonia, and the guidance was equivalent to three month Euribor plus 5bp-7bp and Eonia plus 13bp-15bp. A banker away from the leads noted that on an after-swap basis the deal would pay an absolute all-in level of minus 0.37% based on a three month Euribor fixing of minus 0.42%, putting the return higher than the ECB deposit rate.

Banks were allocated 61% of the deal, central banks and official institutions 26%, and funds 13%. Some 58.5% was placed outside Germany, with the Nordics taking 39.5%, Switzerland 6.5%, France 5.7%, Asia 3.0%, the UK 1.4%, Austria 1.4%, and others 1.0%.

Bankers noted that the re-offer of minus 2bp would appeal to spread-focused buyers, given that the Pfandbrief credit curve is so flat, offering a pick-up of just a couple of basis points in 10 years versus two years.

The pricing was equivalent to 37.5bp over the October 2022 Obl.

Although the order book allowed Berlin Hyp to issue its largest Pfandbrief since January 2013, the number of investors was relatively limited, with 38 accounts participating.

“It was a good outcome, but we have seen more granular books,” said the lead syndicate banker.

“I don’t want to take anything away from the beauty of this transaction – it is a very encouraging trade and we have overcome a hurdle – but we need to be sober about what we read into this,” he added.”

Bankers said Berlin Hyp – which issued the first negative-yielding benchmark covered bond – was the right name to test the new yield levels, but that investors might not be so receptive to other names.

“If you are an issuer who is in the position to entertain issuer-investor relationships as loyal as apparently BHH does, then you will probably find it easy to have a trade like this clearing in the current environment, but it all depends on whether there is this investor base linked to a specific name that will then result into enough people buying into these hilarious yields,” said one. “If you don’t, then probably you will find it difficult.

“If there was another German issuer doing it – Bayern LB, Helaba, DZ Hyp – I think they would end up with something fairly similar, but what will happen if, say, a French issuer tested it or a Scandinavian issuer? The honest answer is, I have no clue.”

Another syndicate banker said the range of issuers who are interested in such short dated issuance is anyway limited.

The development of interest rate expectations and then the outcome of the ECB meeting on 12 September could meanwhile determine the extent of and thresholds for investor interest in negative yielding issuance, said bankers, with many market participants expecting a deposit rate cut of 10bp or 20bp – the latter of which would leave it at minus 60bp, below the yield on Berlin Hyp’s deal.

The lead syndicate banker said that a constructive market tone on the back of renewed dovish signals had helped the outcome, but that a variety of potential negative headlines ahead could disrupt the market.

Virgin Money is planning an inaugural euro benchmark covered bond following a roadshow starting next Tuesday, it was announced today.

The UK bank has mandated BNP Paribas, HSBC, Natixis, NordLB and UniCredit to arrange the European roadshow, with a view to launching its first benchmark covered bond in euros.

Virgin Money issued its first benchmark covered bond in the sterling market in March, a £500m five year Sonia-linked FRN paying a margin of 70bp.