Aareal Bank issued the first benchmark covered bond of 2021 today (Tuesday), a €500m no-grow seven year mortgage Pfandbrief, and its €1bn-plus book and pricing flat to slightly inside fair value was seen by syndicate bankers as a “decent start” to the year that could encourage other issuers.

After announcing the mandate yesterday (Monday), Aareal leads BNP Paribas, Commerzbank, LBBW, Société Générale and UniCredit this morning went out with guidance of the mid-swaps plus 4bp area for the €500m no-grow seven year mortgage Pfandbrief. After around an hour and 30 minutes, books were reported as being at €1bn, including €100m joint lead manager interest. After around two hours and 20 minutes, the spread was fixed at 1bp on the back of over €1.1bn orders, including €100m JLM interest. The final book at re-offer was over €1bn, including €100m JLM interest.

Syndicate bankers said the transaction’s outcome was in line with expectations and represents, in the words of one, “a decent start” for the covered bond market in 2021.

“Aareal is a name that is unlikely to ever see a super-bumper book,” he said, “so I’d say these guys have done pretty nicely with orders peaking over €1.1bn, which minus ECB probably equals €700m of real investor demand.”

Another banker away from the leads said that while the new issue was by no means a blow-out, the book was reasonable considering the pricing at 1bp, which he said was an “ambitious outcome” for the issuer. Orders appeared to stall after the €1bn threshold was crossed, he noted, indicating a degree of price sensitivity in the book.

A lead banker acknowledged this, saying it was only to be expected and did not prevent the issuer achieving its goal.

“There was some price sensitivity,” he added, “but only from those accounts that do not bring any quality to the table.”

Fair value was at around 1bp-1.5bp based on its outstanding July 2027 paper at 1bp, according to bankers at and away from the leads, implying zero to minus 0.5bp of new issue premium.

“If you extend its July 2027s to January 2028,” said the lead banker, “that would give you a level above 1bp – perhaps 1.2bp – so the pricing was slightly below fair value.”

Given Aareal is a relatively small name and the new issue was the market reopener, the pricing through its curve was a great result, he added.

“Being able to move 3bp from guidance is also something good, being the first one out,” he said, “and it was also pretty quick, so I think both investors and the issuer are very satisfied.”

The pricing of 30.1bp over Bunds could also explain why there was not greater demand, he added, but noted that this is common to most Pfandbriefe.

“They’re just way too expensive,” he said, “but even being way too expensive, Aareal was able to be more than twice subscribed.”

A syndicate banker away from the leads said that covered bonds in general will continue to be richly priced for the foreseeable future.

“It’s going to be tight,” he said, “and it won’t make sense from a yield perspective – it’s a technical asset class and will remain so for the rest of the year.”

Aareal’s seven year deal was priced at a yield of minus 0.402%.

A Nordic name is considering issuance, according to another syndicate banker, who said he would not be surprised to see at least one more euro benchmark before the end of this week, but expects French issuers later in the month.

“The Germans are off tomorrow,” he said, “and traditionally, the seventh is the date where covered bond issuers should be out to issue on the back of the Germans returning.”

Today’s result should serve as encouragement for other issuers to approach the market, said another, who highlighted tenors beyond seven years as the likely option for most issuers.

“If we see another Pfandbrief in the next two weeks, it’s going to be long,” he added, “but I believe we’ll see something that has a bit more of a pick-up to it, perhaps something Nordic, Austrian or Dutch.”