The impact of EU issuance next month contributed to Berlin Hyp again reopening the post-summer covered bond market yesterday (Tuesday), according to head of funding and IR Bodo Winkler, while the success of the German issuer’s tenth green bond highlighted its recently-enhanced green targets.

Supply from the European Union to support its SURE (Support to mitigate Unemployment Risks in an Emergency) programme from the second half of September has been expected to put pressure on sovereign, supranational and agency (SSA) spreads, with the potential for knock-on impact in related asset classes, such as covered bonds. DCM officials have therefore been suggesting that issuers bring forward issuance plans to avoid any disruption.

According to Winkler (pictured), Berlin Hyp had already been planning to issue ahead of a €500m redemption in October, and saw no reason to wait.

“There is this ongoing discussion about the EU recovery fund entering the market with massive amounts,” he told The CBR, “and while I am not afraid of it affecting covered bond spreads, or at least Pfandbrief spreads, too strongly, it will at least limit further tightening potential.

“At the same time, the market seemed to be very constructive, with there not having been any issuance for a long time. And the last week of August, when there is typically not too much traffic yet in the market, has always been quite a nice week for us to issue, so we thought, why not continue with that?”

The timing also allowed Berlin Hyp to highlight enhanced green targets announced on 13 August. Its previous goal was for 20% of its lending to be against green buildings and it hit this last year, ahead of its 2020 target, and it is now aiming to move to one-third of its lending being green by 2025.

“At first glance, this might not seem too challenging for a bank that has reached its 20% goal one year early,” said Winkler. “But at the same time, if you go into more depth, you’ll find that in order to reach the new target we will need more or less every second commercial real estate that we finance in the next five years to be green, so it really is ambitious.

“The deal has allowed us to underline how important from a strategic point of view this green finance is for us,” he added.

After a mandate announcement on Monday, leads Crédit Agricole, DZ, HSBC, JP Morgan and LBBW opened books yesterday morning with guidance of the 9bp over mid-swaps area for the €500m no-grow 10 year mortgage Pfandbrief. Orders surpassed €1bn within an hour, and after one-and-a-half hours the spread was set at 6bp on the back of books above €1.3bn. The book ultimately totalled some €2.15bn, comprising almost 100 accounts.

Winkler said execution was “super-smooth”.

“Demand really built up nicely and regularly right from the start,” he said. “Although what surprised me was that after we reached €1bn within an hour, we got around €800m of additional orders when we fixed the price after the second book update – I haven’t seen that on Berlin Hyp deals in the past.

“You are of course always a little bit expectant if you approach the market after a period in which there have been no other covered bond issues,” added Winkler, “but although we were confident that this would work, we understand that it had the highest bid-to-cover ratio of any German Pfandbrief this year, and we could not have expected that.”

The 6bp re-offer spread implied a new issue premium of up to 1bp, according to bankers at and away from the leads.

“Our base case was plus 7bp and the best case was plus 6bp,” said Winkler. “Given the quality of the orders, it would have been possible to price a deal at plus 5bp, but this has never been Berlin Hyp’s style, taking the last basis point. It’s always nice to leave something on the table for investors, and hopefully they remember that next time.”

More than 40% of the paper was placed with SRI investors, according to the leads, and 44% outside Germany, with the Nordics allocated 16%, the UK 10%, the Benelux 6%, France 4%, and Italy 3%. Banks took 45%, funds 39%, central banks and official institutions 13%, and others 3%.

“It is of course very nice to see for us that we are also able to attract foreign investors to an instrument that is widely regarded as quite expensive, the German Pfandbrief,” said Winkler, “which we take as a positive reflection of all the investor engagement we have done in the past. The green element adds to this, of course.

“Whereas many other covered bonds in the recent past that came at tight levels were mainly driven by LCR accounts, almost 40% of this deal went to asset managers. That a bond with a negative yield of minus 0.12% gets such high traction among asset managers must be related to its green element.”