Deutsche attracted only some €600m of demand to an inaugural benchmark CPT structured covered bond today (Wednesday), a €500m five year, although opinion as to whether this reflected attitudes to the innovative offering or market dynamics was mixed.

Deutsche Bank’s deal comes after the issuer presented the programme, which was initially set up in 2016 for retained purposes, to investors.

The conditional pass-through structured covered bonds are rated Aa1/AA by Moody’s and DBRS. Issued by Deutsche Bank AG, they also benefit from a guarantee from SCB Alpspitze UG, an SPV that constitutes the cover pool. Since they are not issued under a legislative framework, they do not benefit from preferential regulatory treatment, with regards to LCR eligibility and risk weights, for example, and they are ineligible for CBPP3.

Deutsche Bank already issues benchmark mortgage-backed covered bonds rated Aaa in Germany under the Pfandbrief Act, benchmark cédulas via Deutsche Bank SAE, and has a Deutsche Bank SpA OBG programme, although it has not issued publicly off the latter.

The cover pool of the structured programme – initially some €2bn – includes primarily German residential mortgages but also European commercial mortgages, with a 15% minimum overcollateralisation commitment. The maximum LTV for residential mortgages is 80%, rather than the Pfandbrief Act’s 60%, although some mortgages are understood to be included in the structured rather than Pfandbrief pool because they do not satisfy documentation requirements for the legislative instrument, rather than necessarily being of a lower credit quality.

This morning, Barclays, BBVA, Commerzbank, Credit Agricole, Deutsche and TD went out with guidance of the mid-swaps plus the low 30s area for the inaugural structured benchmark. An initial update put books above €600m, and the deal was ultimately priced at 32bp on the back of €570m of demand.

A syndicate banker at one the leads said she was very satisfied with the inaugural trade.

“This is a new product for the issuer and something that is very unique, in that it has not been tested before,” she said.

Arguably the most comparable precedent for Deutsche’s structured covered bonds is a SME-backed structured benchmark issued by Commerzbank in 2013, although the new issue has more traditional mortgage collateral.

The conditional pass-through structured covered bonds are rated Aa1/AA by Moody’s and DBRS. Issued by Deutsche Bank AG, they also benefit from a guarantee from SCB Alpspitze UG, an SPV that constitutes the cover pool. Since they are not issued under a legislative framework, they do not benefit from preferential regulatory treatment, with regards to LCR eligibility and risk weights, for example, and they are ineligible for CBPP3.

Bankers away from the deal said they were unsure how wide an investor base the product would appeal to, with one suggesting it would be too unfamiliar a concept to credit investors, with the spread not making a thorough analysis worth their while, and not to every traditional covered bond investor’s taste.

“The German community has hard bullets in its DNA,” said another.

He noted that the deal offered a significant pick-up to Dutch CPT issuers, suggesting this was partly attributable to headline risk around the Deutsche name.

Analysts have noted that the conditional pass-through mechanism varies from precedents such as Dutch issuers’, with, for example, all outstanding issues potentially becoming pass-through at the same time in certain circumstances.

The lead banker said that although she would have preferred a more substantial order book, the fact that some investors do not participate in inaugural trades was also a contributory factor, as was a significantly softer market backdrop, as reflected by similarly constrained bookbuilding for Danish Ship Finance (see separate article).

“The market definitely took a turn, and some investors got nervous,” she said. “They were happy to take a look into the first such transaction, but ultimately they let it pass and await the next one.

“Overall this is an innovative product,” she added. “We had very good feedback and interest from that perspective, and we got a comfortable €500m five year done at plus 32bp, which is a nice outcome from the issuer’s perspective.”

Ahead of the transaction, five year Deutsche Bank Pfandbrief were trading in the context of mid-swaps flat, and its senior preferred 70bp-75bp wider, according to a covered bond analyst.

“When setting up a programme such as DB’s SCB the motivation is to save funding cost versus senior preferred debt,” he said. “Hence, for the programme to make sense, funding levels need to be sufficiently far away from senior levels.”

The same distance between its covered bonds and senior paper as Commerzbank’s SME deal was would have put Deutsche in the mid to high 30s, but that the more familiar collateral should have helped Deutsche achieve a tighter level, he added.

The analyst noted that the programme is not intended to replace, but complement Deutsche’s Pfandbrief issuance.

“In its investor presentation, DB states that the strategic transformation of the bank will reduce external funding needs,” he said. “However, while structured unsecured funding will be reduced, plain vanilla funding will be less affected and a stricter focus on funding costs will mean there is a need to increase long term secured funding.”

The German bank has said that it plans to issue €2bn-€3bn per year off the programme, and the lead syndicate banker said Deutsche intends to use structured covered bonds as a regular funding tool, which could see it issuing again in 2020.

“People are very interested in the structure and I would not rule it out that this could set some sort of trend,” she said, “although at this stage, its too early to say.”

A banker away from the leads was more downbeat.

“I’m not sure if it was a question of the deal or the market, but I don’t think this will give issuers the confidence to move towards such programmes,” he said. “I can’t see that there is much incentive from either a demand or a pricing perspective.”