LBBW attracted more than €5bn of orders to a €1bn Pfandbrief with a rare two year tenor on Tuesday, as wide Bund-swap spreads boosted demand for covereds, with a BayernLB green trade also flying high, but bankers warned that issuers must continue to heed investors’ preferences.

A syndicate banker at one of Landesbank Baden-Württemberg’s leads described the short maturity as “uncharted territory”. The last euro benchmark in the maturity is understood to be a MünchenerHyp €500m two year public sector Pfandbrief issued almost a decade ago, in November 2012, while in even shorter maturities, LBBW itself issued a €500m 15 month public sector Pfandbrief in February 2014.

After LBBW’s mandate was announced on Monday, it hit the market on Tuesday morning with guidance of the mid-swaps minus 6bp area for a euro benchmark-sized October 2024 public sector Pfandbrief, expected rating Aaa. After around an hour, the leads reported books above €3bn, excluding joint lead manager interest, and after an hour and three-quarters, they set the spread at minus 12bp and the size at €1bn on the back of books above €4.7bn. The final book was €5.1bn, excluding JLM interest, comprising some 185 accounts. The deal was priced with a coupon of 2.75% and yield of 2.874%, equivalent to 105.8bp over Bunds.

“A very, very nice transaction, no doubt about it,” said the lead banker. “If this had been a traditional maturity, one would have said it was mispriced – we started at less 6bp, priced at less 12bp, and in secondary this is up to less 20bp or so – but this is a product for which the more traditional yardsticks just don’t apply and there as a lot of fact-finding and price discovery involved.”

A banker away from the leads echoed this.

“It’s very much a case of parking cash in a safe haven instrument,” he said, “a two year triple-A German Pfandbrief at minus 12bp but still offering you around 100bp over Bunds. I felt on a spread basis it was quite punchy, but people didn’t care what the swap level was with the Bund-swap spread being historically very wide.

“Anything short dated just flies out the door.”

According to another lead syndicate banker, the choice of the rare maturity was partly driven by investor input before the deal was conceived.

“We were talking with a couple of the central banks and they were telling us that they were looking for very short dated paper and in Pfandbriefe,” he said, “and we said, OK, three years is easy nowadays, but they were looking for shorter than three years.

“We said it’s difficult to find someone who might do something like that, but then LBBW treasury told us they would like to do this. The first question every investor then had when we announced was, why two years? And it’s actually pretty simple: ALM driven, they have collateral there which was this short and they just wanted to put it to work.”

Discussions then turned to relative value, with the only recent and hence relevant covered bond issuance anywhere close to the proposed maturity being a €1bn August 2025 green Pfandbrief issued by Berlin Hyp in August, which was re-offered at minus 4bp and trading at minus 17bp. The lead banker said the only alternative comparable was 2024 KfW paper trading at minus 70bp.

“The gap between the two was so huge that there was a lot of room for us to see where fair value might be,” he added.

The leads arrived at a figure of around minus 18bp, based on factors including the market having deteriorated since Berlin Hyp tapped the market, LBBW’s issue being shorter but not green, and secondary levels being somewhat unreliable. Although LBBW is a name that can tap the market on an intra-day basis, the deal was pre-announced to allow investors to get their heads around the pricing, according to the lead banker, which would they would likely at first glance resist as too tight.

“This was the best decision we could have taken,” he added. “We announced at 11 o’clock; at 12 o’clock everybody was saying, this is too expensive; at three o’clock, everybody was saying, oh, well, maybe it makes sense. And normally in a covered bond you have 10 to 15 lines in terms of feedback the day before – here we had more than 65 lines.

“And then you saw what happened the next day.”

He said the execution and subsequent performance validated the fair value thoughts, with pricing of 14bp possible but the issuer deciding on investor-friendly pricing of 12bp.

Syndicate bankers said the prospects of further supply in the two year part of the curve were mixed.

“It was a pretty unique choice they took here,” said one. “It suited them well from an ALM perspective and if there were someone else who had the same idea, then why not? They’d be more than welcome. But I can’t think of many candidates because normally you would keep your cover pool for, let’s say, rainier days and longer maturities, rather than putting them to work for two year funding.”

Another banker was more optimistic, suggesting that Dutch or French issuers could find such issuance viable, and it is just a matter of time before a follow-up trade, while an analyst noted that potential issuers will now have the benefit of a clear pricing reference.

Shorter the safer option

LBBW’s euro benchmark was one of eight totalling €6bn since Monday, with the week’s other German trade providing another highlight: BayernLB on Wednesday attracted some €2.4bn of demand to its first green mortgage Pfandbrief, allowing it to price the €500m no-grow five year at mid-swaps minus 3bp, 5bp inside the middle of initial guidance and 1bp through fair value, suggesting a greenium for the inaugural trade.

“BayernLB was definitely the trade of the day,” said a syndicate banker at one of the leads. “Everybody looked at that trade and said it would work from, starting at the 2bp area and then landing at minus 3bp or so, so through their own curve – nobody questioned that from the get-go.”

Belgium’s Belfius on Tuesday also achieved a strong result in the five year maturity with its first euro benchmark since January 2020, a €500m deal tightened from guidance of the 10bp area to a re-offer of 7bp on the back of a book of some €1.25bn, with the new issue premium put at up to 3bp.

“Five years is just the nice-to-have maturity at this stage,” said a syndicate banker at one of the leads, “appealing to most investors.

“This is still a market very much capped in the area of seven years, with maturities significantly longer than five years are a sort of no man’s land,” he added. “Although with a decently-priced transaction of good quality, you might find yourself in the position to appeal to investors with, say, a 3.5% coupon in 10 years, which isn’t bad, after all.”

Caffil sold a €1bn long six year trade and La Banque Postale a €1bn long seven year on Monday and Tuesday, respectively, on the back of books of around €1.35bn and €1.5bn, with both French issuers tightening by 2bp from initial guidance and paying new issue premiums of around 5bp. The outcomes of the two trades beyond five years were deemed respectable, if modest by the issuers’ standards. (See separate article for related Caffil coverage.)

Hypo Vorarlberg (Vorhyp) opted for a shorter maturity on Wednesday when it became the latest Austrian issuer to approach the market, selling a €500m 4.3 year deal. A lead syndicate banker said that the shorter tenor was chosen in light of the heavy supply from the jurisdiction this year, while the issuer also offered a new issue premium of 5bp-6bp after tightening pricing from initial guidance of the 18bp area to 16bp on the back of a peak €750m of orders.

“They knew there had been a bit of oversupply and maybe a little fatigue towards Austrian names,” said the lead banker, “so we told them that if you want it to work, offer something that investors want, which is five years or shorter with the right concession, and they listened.”

Commonwealth Bank of Australia chose the three year maturity for a €1bn trade on Wednesday and tightened pricing from the 20bp area to 18bp on the back of a peak €1.3bn of demand, implying a new issue premium of around 6bp. A lead banker said the maturity made sense for the non-Eurozone paper given that such supply had been performing less well.

“This was the right tenor and hit the spot for a lot of bank treasuries and official institutions, but we also had some significant real money involvement. CBA is not the most frequent name and so offered a little bit of extra scarcity value versus, say, the Canadians, who have been very active.”

And Belgium’s Argenta Spaarbank on Wednesday issued in the four year maturity for a €500m deal, paying a re-offer spread of 14bp following initial guidance of the 16bp area and on the back of some €700m of orders, with the new issue premium put at 4bp-5bp.

“It went OK,” said a lead banker. “Our base case was moving 2bp and that turned out to be the reality. The market is still digesting all the paper in the short to intermediate maturities, and you need a bit more time for special animals like Argenta or Vorhyp.”

And a syndicate banker warned that in the face of ongoing heavy supply, issuers will need to continue to approach the market with a degree of caution.

“As the supply keeps coming, the secondary market is starting to drag wider,” he said. “People were thinking that, with the front-loading we’ve seen, things might start to slow in October, but we’re beginning to see a little bit of pre-funding and more repetitive occurrences of issuers.”

Helaba’s analysts are the latest to have increased their euro benchmark issuance forecast for the year, raising it to €190bn.

Euro benchmark issuance volumes, cumulative by weeks (EUR bn)

Source: Helaba Research & Advisory, Bloomberg