Having frontloaded its 2020 funding, LBBW could wait until spreads were near pre-crisis levels before reopening the German euro benchmark segment via a €500m six year Pfandbrief on Monday, with the success of the transaction demonstrating the health of the market, according to the issuer.

Patrick Steeg, head of asset and liability management at Landesbank Baden-Württemberg (LBBW), said that when the crisis struck, the bank could afford to wait before approaching the market, thanks to the funding strategy it had adopted for the year.

“While we never expected such a pandemic, we had anticipated that there might be some volatility in the second half of the year, and our original plan had been to frontload our funding,” he told The CBR.

The bank thus raised 40% of its 2020 target in January and February alone, kicking off with a €750m long seven year mortgage Pfandbrief on 7 January and following this with two senior non-preferred issues, a green bond in sterling and a social bond in euros.

“Then unfortunately the whole crisis started,” said Steeg, “but we were lucky to have already raised a big part of the original funding plan. We could afford to wait and see how the situation developed, which was a valuable position to be in during such a crisis.

“We could then see that all the fiscal and monetary measures were working, resulting in a massive spread tightening across all asset classes – from AT1 down to covereds – to the point where we have almost reached pre-crisis levels again, and we felt that this presented a good market window to issue a Pfandbrief.”

LBBW also saw little benefit in waiting to tap the market, according to Steeg.

“We expect the market to improve further in certain credit asset classes – especially senior, Tier 2, AT1 – but we feel that the scope for further spread tightening in covered bonds is perhaps limited in current market conditions,” he said.

“Technically, the asset class is well supported – we expect supply to be way below the originally anticipated volumes – due mainly to the TLTROs – and that imbalance in supply and demand is good for covered bond spreads. However, Pfandbriefe already trade at levels at or even below German Länder and that could be a floor for the time being.”

Steeg also cited the risk of renewed volatility arising into the summer.

“In such an environment, we always have to expect phases of consolidation, phases of volatility,” he said. “The publication of Q2 results from banks and corporates will offer a bit more transparency around the impact of the crisis on balance sheets, which could potentially lead to such a phase of volatility, and we wanted to avoid issuing a covered bond or other instrument in that period.”

As alluded to earlier, covered bond supply has been stymied by the competition from cheap central bank funding, but although LBBW will like other banks make use of the TLTROs, this will only replace senior preferred in the issuer’s funding strategy, according to Steeg.

“It is just pure liquidity for a maximum of three years,” he said. “It doesn’t give you any MREL benefit, and it doesn’t give you any more duration. So in order to meet MREL and duration requirements, we still need to issue senior non-preferred and covered bonds with longer duration.”

LBBW entered the market with its public sector Pfandbrief on Monday morning, with leads ABN Amro, Crédit Agricole, Commerzbank, LBBW and UBS opening books for the €500m no-grow six year issue at initial price thoughts of the 7bp over mid-swaps area. Guidance was subsequently set at 4bp+/-1bp, WPIR, on the back of some €1.75bn of orders, and the deal was ultimately priced at 3bp over on the back of €1.9bn of demand from 62 accounts good at re-offer.

The IPTs were tighter than had been initially anticipated on Friday afternoon, with the market continuing to rally strongly, according to Achim Walter, senior funding officer at LBBW.

“The syndicate group was already positive on Friday and the mood improved further still, such that we could go out with the 7bp level,” he said. “We then felt that moving to 4bp and finally 3bp was the right approach – tightening in 5bp-6bp like some deals have would perhaps have been a little overdone, given where we started.

“We are very happy with the outcome,” he added. “With this trade we have set a real landmark in terms of levels, and the fact that we didn’t have many drops at the re-offer of 3bp demonstrates that we have a very sound and healthy market at the moment.”

Banks were allocated 50% of the paper, funds 23%, central banks and official institutions 19%, and insurance companies and pension funds 8%. Germany took 57%, Austria and Switzerland 14%, the Nordics 14%, the UK and Ireland 6%, France 5%, the Benelux 3%, southern Europe 1%, and others 1%.

The deal was the first euro benchmark covered bond this year in the six year maturity. While providing the longer duration being targeted by LBBW in its covered bond issuance, the choice of tenor fit into the issuer’s maturity profile, according to head of investor relations Peter Kammerer, as well as corresponding cover pool assets.

“For us, going beyond five years was key,” he said, “and looking at our current pool and outstanding covered bonds, six years was the perfect match. And investors did not hold back, so this was a good choice.”

LBBW is now very well advanced in its 2020 funding plan, according to Steeg, with only one or two public transactions likely over the remainder of the year.

“We are very happy that the private placement business is very strong, delivering a significant portion of what we have already done,” he added. “It is the strongest it has been for several years.”