Münchener Hypothekenbank showed 10 years to be a viable option for Germans on Wednesday, with a €500m no-grow green Pfandbrief almost seven times subscribed some 11bp inside the most recent French 10 year, opening the door to its compatriots, Martin Schmid told The CBR.

MünchenerHyp’s new issue comes after it in November sold a €500m five year green mortgage Pfandbrief.

“Our expectation was that the beginning of the year would be very busy,” said Schmid, head of strategic funding and ALM, “and as we are a very tight issuer, it’s always a challenge if there is a lot of traffic. So we decided to go out in November with the €500m no-grow five year so that we would have enough liquidity and could use a window later in January when most banks – but not us – are in blackout periods.”

That five year euro benchmark was the MünchenerHyp’s fifth of 2023, the longest of which was a seven year in June, with the issuer facing the same conditions that resulted in overall euro covered bond issuance being focused on the shorter end through 2023 and particularly its second half. The German bank’s last euro benchmark of 10 years or longer was in August 2022, while the last German 10 year was a €500m deal for LBBW in June 2023 at 19bp over mid-swaps, just before Bausparkasse Schwäbisch Hall postponed a planned 10 year Pfandbrief mid-bookbuilding.

“We really like it that 10 years are working at the moment, because we need the duration on the liability side, given that we have long dated assets. And over the last two years, we have not been in a position to print a 10 year because the market was not open for that, or at least only at prices that were not favourable.”

Indeed, although the 10 year and longer part of the euro curve was reopened by Crédit Agricole at the start of the year, followed by its compatriots, German issuers had been largely hesitant to follow suit, with only debutant Landesbank Saar doing so, in a €500m public sector Pfandbrief on 10 January at mid-swaps plus 46bp – 3bp inside where CRH had issued a €750m 10 year a week earlier, with Caffil issuing a €1bn 10 year just 1bp tighter a week later.

“We saw the French issuers coming with a premium of perhaps 10bp to our own levels,” said Schmid, “and no one knew how investors would react if a Pfandbrief were issued at much tighter levels.

“Where would the floor be for a 10 year bond for MünchenerHyp?”

It remained to be seen whether investors would expect a spread closer to the French issuers, or if the German issuer could crystallise a spread 10bp or more tighter. The latter looked likely after Rabobank of the Netherlands sold a €1.5bn 10 year at 37bp on Tuesday.

“We had been monitoring the market in recent weeks and then we saw the perfect window with Rabobank out there the day before.

“The levels are wide, for sure, but the entire curve has widened,” he added, “and the difference between five and 10 years is in a range that is acceptable for us. So we decided to go out with the 10 years now.”

After a mandate announcement on Tuesday, MünchenerHyp leads ABN Amro, DZ, LBBW, NatWest, NordLB and Santander opened books on Wednesday morning with guidance of the mid-swaps plus 41bp area for the €500m no-grow February 2024 green mortgage Pfandbrief, expected rated Aaa. After around three-quarters of an hour, they reported books above €1.5bn, excluding joint lead manager interest, and after close to two hours, they set the spread at 34bp on the back of books above €2.9bn, including €285m of JLM interest and pre-reconciliation. The book closed with more than €3.4bn of orders good at re-offer.

“The shadow book was in an unusually good condition the day before launch,” said Schmid, “within 10 minutes of opening books, we had more than €1bn of orders, and every 15 to 20 minutes it was crossing a new threshold. And even after we set the spread 7bp tighter, the book was still growing, which was very encouraging.”

The re-offer spread was 11bp inside where France’s La Banque Postale priced a €750m 10 year green covered bond on Friday.

“We are very happy with the pricing,” said Schmid. “Everyone now knows that 10 years is on fire and it could open the door for more German issuers to follow.”

Schmid said that although the green nature of the Pfandbrief did not affect pricing, it boosted the quality of the book, with around 20% of demand coming from dedicated green investors.

After last year’s five euro benchmarks – which were supplemented by taps – MünchenerHyp is likely to be less active in 2024, according to Schmid, with three or four including this week’s new issue. It is also eyeing its regular Swiss franc market and could return to sterling ahead of a December maturity if conditions are favourable, he added, but is unlikely to sell a public dollar Pfandbrief, instead meeting its needs in the currency via private placements.