A €500m seven year Aareal mortgage Pfandbrief that opened the 2021 euro benchmark covered bond market on Tuesday achieved a “fantastic” outcome, according to a funding official at the German bank, who said the latest issue will support growth in its loan book.

Alexander Kirsch, director, funding and debt investor relations, treasury, Aareal Bank, told The CBR that the issuer had a funding need in the first quarter, and the question was then when exactly it should approach the market.

“I wasn’t on holiday, but working from Monday to Wednesday of last week,” he said, “so I had a lot of calls with dealers. Sometimes markets are very crowded in January, but what I realised is that the FIG pipeline was not so crowded, especially on the covered bond side, with nothing expected on Monday or Tuesday – because of the Epiphany holiday today (Wednesday), many people are still on vacation, and a lot of banks are waiting for next week or the following week. Markets were quite strong, with the agreement between the EU and UK helping, and the pricing looked good, so we mandated banks very early on Monday morning.

“Normally we wouldn’t be in the market so early,” added Kirsch, “but we were ready to issue and have more to do this year, so why wait? Being first also means we get the full attention of the market.”

Aareal mandated banks early on Monday morning and then announced its planned issue around midday, before leads BNP Paribas, Commerzbank, LBBW, Société Générale and UniCredit on Tuesday morning launched the €500m no-grow seven year mortgage Pfandbrief with guidance of the mid-swaps 4bp area.

“The aim was to price around fair value,” said Kirsch, “which was seen at around 1bp, plus or minus 0.5bp. The book grew very quickly so in the end we had the chance to price the bond at 1bp, which I would say was slightly inside fair value.

“Overall, this was a fantastic transaction for us.”

Some €1bn of demand from 36 accounts was good at re-offer. Germany and Austria were allocated 80%, Italy 8%, Nordics 6%, Switzerland 4%, Asia 1%, and other 1%. Banks took 45%, central banks and official institutions 29%, asset managers 24%, and insurance companies and pension funds 2%.

Kirsch (pictured) highlighted the strong demand from bank treasuries.

“Treasury accounts normally buy the bonds in an assets swap package, swapping it against Euribor,” he said, “and Euribor was at minus 55bp, meaning that even if you get a spread of plus 1bp, you’re receiving minus 0.54% – this is even lower than the deposit rate at the ECB.”

“A reason for this is perhaps that we have a very loyal investor base,” added Kirsch. “I did a lot of marketing even last year to stay in contact with our investors – virtually on conference calls, video conferences, etc – and it was good to see so many in the book. It’s not as granular as a credit book – for a senior deal, for example, where there are more investors – but we are very happy with the performance.”

The low rate environment contributed to Aareal choosing the seven year maturity, as did its funding strategy.

“Investors are definitely preferring longer maturities,” said Kirsch. “It’s still negative, but the longer you get, the less negative it is. And on our side, it doesn’t make sense to do a three, four or five year covered, since this conflicts with the TLTRO. With the seven year, we extend our maturity profile.

“The TLTRO is a fantastic support when it comes to funding,” he added, “but you don’t want everything maturing in three or four years’ time. And it also makes sense to show to the regulator and investors that you have market access and keep your name visible in the market.”

Aareal’s new benchmark comes relatively soon after its last, a €500m short six year on 21 October. Kirsch said the additional funding is supporting growth in Aareal’s lending.

“We have a sound capital position – with a total capital ratio of more than 30% – we have a lot of liquidity, and we see good market opportunities,” he said, “and therefore Aareal Bank has decided to increase its loan book.”

The economic fallout from the pandemic has raised questions over the outlook for commercial real estate, but Kirsch said this was not an issue for the new bond.

“A combination of factors contributed to this,” he said, “investors still reference very strongly the Pfandbrief law and the triple-A rating; there is a lack of supply; and the whole market environment is greatly affected by ECB policies.”