LBBW launched the first German benchmark in over three months today (Monday), a €500m no-grow six year Pfandbrief that attracted over €1.75bn of demand flat to fair value, prompting bankers to declare spreads had all but normalised, even if some investors found the level hard to take.

Following Landesbank Baden-Württemberg’s mandate announcement this morning (Monday), leads ABN Amro, Crédit Agricole, Commerzbank, LBBW and UBS went out with guidance of the mid-swaps plus 7bp area for the €500m no-grow six year public sector Pfandbrief. After around an hour, books were reported as being over €1.25bn, excluding joint lead manager interest, and after around an hour and 50 minutes, guidance was revised to 4bp+/-1bp, WPIR, on the back of over €1.75bn of demand, excluding JLM interest. It was ultimately priced at 3bp with a book of over €1.75bn good at re-offer.

The last German benchmark was a €1.25bn 10 year for Commerzbank at 8bp over on 3 March that was launched just as fears about the impact of Covid-19 were beginning to sweep over the financial markets. LBBW’s re-offer spread today is flat to that of the last pre-crisis German benchmark, a €500m seven year for Deutsche Hypo issued on 11 February.

A syndicate banker away from LBBW’s leads said the deal had successfully reopened the German market, indicating that re-offer spreads had all but normalised to pre-Covid levels.

“It’s a really good test of the real core market,” he said. “The book was fine and it was a very strong outcome, even for a €500m no-grow, showing there’s a big investor base chasing these bonds.”

Given the dearth of supply since the onset of the crisis, its positive reception was unsurprising, according to the syndicate banker, who added that it offered good relative value versus recent Belgian and French paper.

“KBC’s long five year from 27 May was at plus 4bp this morning,” he said, “so the difference between the French, Belgians and the Germans is not that big, meaning relatively speaking, this makes a lot of sense – and it also does versus underlying Bunds.”

LBBW’s deal was priced at 35.2bp over the Bund.

“Should this persist,” added the syndicate banker, “there will of course be further discussions over relative value, like how low can you go versus other assets? But for now, it’s perfectly in line.”

The new issue was priced flat to fair value, according to syndicate bankers at and away from the leads.

“3bp for the six year today leaves zero new issue premium for investors,” said another banker away from the leads, “but I think this was something everyone was prepared for right from the start.”

However, while noting the successful execution, he said he had expected the trade to develop more dynamically considering it was a €500m no-grow, with recent trades having moved around 5bp-6bp from guidance to pricing and amassed order books in excess of €2bn.

“In the end, they moved only 4bp,” he said, “but in any case, I’ve no real complaints with €1.75bn or so for a €500m trade.”

A lead banker acknowledged that a few factors could have contributed to momentum being less strong, including some market participants being taken surprise early on a Monday morning, a congested market with supply in other asset classes, and guidance – while not unusual for a Pfandbrief issuer – being at a level unseen in over three months.

“Spreads have tightened quite a lot,” he said, “so with this Pfandbrief, people needed to rub their eyes to see how far back they’ve come, and 7bp was maybe too expensive for one or two investors.”

Around 70 accounts were in the book, around half the number seen in the strongest recent transactions, he noted, saying this could be a reason why a further basis point of tightening more in line with recent supply was not achieved.

“It’s part of the normalisation,” he added. “Had you squeezed it tighter, you would’ve lost order quality, so it was quite wise to settle with 4bp of tightening, because having a well-diversified, high quality orderbook is, amongst others, a key objective of the issuer.

“Of course, it would have been possible to go to 2bp,” he added, “but some prudence was warranted here.”

The deal was priced at a yield of minus 0.188%, which another lead banker said did not affect the transaction.

“Hardly anyone mentioned it,” he said, “and in the end, an almost €2bn order book speaks for itself, so a great success.

“It’s what we expected given the lack of supply and the broader rally witnessed last week,” he added. “All the transactions on the screen today are very convincing and the continuation of last week’s general rally, particularly in the AT1 market, is crazy.”

Achmea is expected to launch a €500m no-grow five year conditional pass-through transaction tomorrow (Tuesday), after announcing its plans this afternoon. ABN Amro, DZ, ING, Rabobank, SG and UniCredit have the mandate.

The new issue will be the Dutch issuer’s third euro benchmark covered bond, following €500m deals in 2017 and 2019. According to pre-announcement comparables circulated by the leads, its November 2024s were at 22bp, mid, and its February 2026s at 24bp.