Germany’s Münchener Hypothekenbank scored a rare £350m long three year fixed rate covered bond amid England’s footy-phoria earlier this month, leaving MünchenerHyp’s Martin Schmid “feeling like Gareth Southgate”, as it found new fans and competitive funding.

According to Martin Schmid, head of strategic funding and ALM at Münchener Hypothekenbank (MünchenerHyp), the issuer approached the market ahead of a £285m sterling maturity in November, a private placement held by two investors. With around €350m-equivalent of sterling-denominated assets in its cover pool, the issuer preferred to retain sterling funding and considered whether to refinance the outstanding bond closer to maturity in a private placement format or to prefund by approaching the market with a benchmark now.

“For a public trade, we need to take two things into account,” said Schmid. “We need to have a very good sterling market with strong investor demand, and at the time we had a very strong market. And the euro level has to be attractive for us, and the euro-sterling cross-currency basis was in a very comfortable position.

“We do not often see both a very tight euro level and a very tight sterling level, so the timing made sense for us.”

The last syndicated sterling covered bond in fixed rate format was a Deutsche Pfandbriefbank (pbb) £300m long three year mortgage Pfandbrief in September 2018. Since then, all benchmark sterling covered bond supply has been in floating format, with the market having meanwhile made the transition from Libor to Sonia.

MünchenerHyp had not issued publicly in sterling since 2013 and its debt issue programme does not yet include Sonia language, so any new issue had to be in fixed rate format, meaning the issuer faced two challenges when approaching the market, said Schmid.

“Firstly, we were unsure whether there would be enough demand if we were to issue a fixed rated bond,” he said. “The second challenge was that we had not been in the sterling market for eight years, so investors might no longer have lines available.

“So we decided to proceed in a more conservative way, announcing the trade, then doing investor calls, and then proceeding with execution.”

Plans for the December 2024 fixed rate sterling benchmark mortgage Pfandbrief, rated Aaa, were announced on Tuesday, 6 July, and the following afternoon, leads Credit Suisse, HSBC and NatWest began taking indications of interest (IoIs) for an expected £300m deal at initial price thoughts of the Gilts plus 42bp area, with a view to launching the trade the next day.

On the Thursday (8 July), they opened books with guidance of the 42bp area on the back of some £280m of IoIs. After an hour and 50 minutes, the leads reported books above £500m, and after two and three-quarter hours, they revised guidance to 40bp+/-1bp, will price in range, on the back of books above £570m. After three hours and 20 minutes and with orders above £500m at revised guidance, they set the spread at 39bp and the size at £350m (€405m), and the final book good at re-offer remained above £500m.

Schmid (pictured) said that orders came in more quickly than expected.

“We had strong IoIs the day before, and when we opened books the next day, we had orders coming in from continental Europe in the first one or two hours, and then the British investors came into the book,” he said. “We now have a lot of new investors in our Pfandbrief.

“We had really good timing,” he added, “because the market was strong – England won the semi-final the day before, so perhaps investors were in such a good mood that it helped support our trade.”

UK accounts were allocated 35%, Germany 32%, the Nordics 20%, Switzerland 8%, Asia-Pacific 4%, and others 1%. Banks took 38%, central banks and official institutions 32%, and asset managers 30%.

“In euros, we really have a brand, but in sterling, we were not so well known,” said Schmid, “so we were very happy with the order book – and also the spread that we achieved. I believe we achieved the tightest level outside UK issuers – Canadian covered bonds are very tight, but we were at least at the same level or 1bp tighter.

“The lead managers did a great job in guiding us well,” he added. “I feel like Gareth Southgate with this winning trade, but it was the team that did the work.”

Schmid said the after-swap cost of the new issue was six month Euribor plus 5bp-6bp.

“We only had to pay a really small pick-up versus euros,” he added.

MünchenerHyp issued two euro benchmarks in the first half of the year, a €500m short 19 year in January and a €500m 15 year in April. It has also raised around €1bn-equivalent through Swiss franc issuance in public and private formats so far in 2021.

“That’s a great success, because the Swiss market is much more limited than the euro market,” said Schmid, “and hopefully we can do more. We will also issue at least one more euro benchmark Pfandbrief this year.”