A €500m seven year Hypo Noe deal on Tuesday allowed the Austrian to extend beyond the maturities of TLTROs and a planned green bond, its head of treasury and capital markets told The CBR, with an improvement in spreads and unclear outlook playing into its timing.

The new issue is the first Eurozone benchmark from outside France since 5 March and the first new euro benchmark in over two weeks, the last having been a €1bn five year for Caffil on 28 April, which was the latest in a series of French trades priced at progressively tighter spreads.

Thomas Fendrich, head of treasury and capital markets at Hypo Noe (pictured), said the bank had been monitoring the market for some time, and, amid the tightening levels and upon receiving constructive feedback from its leads and investor base, it decided to proceed, confident the transaction would succeed.

“We looked at the Canadian and then the French trades, but these levels were just too wide for us,” he told The CBR. “After watching the market more closely, we received feedback that investor appetite was in good shape and that this could be a good opportunity – especially for the Austrian community – as there was no competing supply in sight. In the end, investors gave us the impression that it was the responsible thing to do and therefore the right time to come to the market.

“We have also seen volumes on the asset side growing very well,” he added, “so we decided it was better to take advantage of the current market, given nobody knows what Covid-19 will bring in the future. There could be a second wave and the levels could widen again, so we decided this was the right window. Clearly, levels before corona were better, but the gap is not as wide as we saw immediately after the current crisis began.”

Many market participants have attributed the only-sporadic issuance of euro benchmarks since the Covid-19 pandemic hit financial markets to competition from cheaper central bank facilities such as TLTRO III, but Fendrich said the bank was aiming to secure funding longer than their three year maturity limit.

“The feedback from the investor side was that a seven year would work very well,” he added. “Also, from a yield perspective, it was around 0% for seven years, which had the potential to help the transaction. In our cover pool we have assets that go much longer than that, so it would not have made much sense to go shorter than the seven years we eventually went for.

“A five year could have actually worked,” he added, “but we have a potential senior transaction in green bond format on our radar for the current year that we want to reserve a shorter maturity bracket for.”

The deal is only the second to extend beyond five years since 6 March, following a €1.25bn seven year from France’s CRH on 23 April.

Leads BNP Paribas, Commerzbank, Erste, LBBW and NordLB opened books on Tuesday morning for the €500m no-grow seven year transaction with guidance of the mid-swaps plus 25bp area, and one hour later, on the back of over €2.2bn of demand, the guidance was revised to 20bp+/-1bp with books to close 30 minutes thereafter. The deal was ultimately priced at 19bp on the back of over €2.7bn of demand, excluding JLM interest.

Fendrich said it was a “perfect” outcome, as indicated by a granular order book just shy of €3bn comprising some 127 orders, and 6bp of tightening during the execution process to land at 19bp – 3bp tighter than the last euro benchmark, Caffil’s at 22bp, and the lowest re-offer spread achieved by a covered bond issuer since the peak of the pandemic’s impact on financial markets in the week of 9 March.

Germany took 48.3% of the bonds, the Nordics 14.4%, Austria 13.4%, Switzerland 7.5%, the Benelux 4.8%, southern Europe 3.7%, the UK and Ireland 3.4%, and France 2.9%. Banks were allocated 53.2%, asset managers 22.6%, central banks and official institutions 19.1%, insurers 3.4%, and others 1.7%.

According to lead manager Erste, the orderbook is the largest ever achieved for Hypo Noe on a syndicated issue and represents the second highest subscription ratio of all covered bonds issued this year. It said this reflects a strong credit perception of Hypo Noe as a household covered bond issuer among the global investor community.

The transaction tightened 1bp-2bp in the secondary market, according to Fendrich, who said it had left the window open for another European issuer to tap the market for a larger volume.

“There’s clearly a chance to get a deal done at a good level,” he said, “but maybe for the German community the levels are still a bit too high. For the Austrian community, however, I believe other banks will now take a look at the market.”