Anchor demand from Asia paved the way for Deutsche Pfandbriefbank to yesterday (Tuesday) price a £250m (Eu312m) seven year issue inside UK covered bond levels that offered value for the issuer versus euros, according to bankers on the rare sterling Pfandbrief deal.

Leads Goldman Sachs and Nomura priced the deal, said to be the first mortgage Pfandbrief in sterling since 2005, at 90bp over Gilts, in line with guidance of the 90bp over area.

The issuer was initially focussed on targeting UK accounts, having gone on a roadshow (via Barclays and UBS) in early October, but anchor demand from Asia ended up providing the foundation for yesterday’s transaction, according to Marko Nikolic, head of covered bond origination at Nomura.

“It was important for pbb to establish a footprint in the sterling space,” he said, “and we had uncovered demand in Asia after doing extensive work there, on covered bonds in general and then specifically around Pfandbriefe and pbb’s credit story.”

Just shy of 20 orders were placed to just about cover the £250m deal, said Nikolic, with nearly half of the bonds placed in Asia, and one account in particular, and the rest going to “a tail” of UK real money investors.

“A few of the larger funds played, and then there was quite a long list of smaller orders that added demand,” he said. “A whole bunch of names were new.”

At 90bp over Gilts, pbb’s deal was seen coming inside UK covered bond levels, which surprised some market participants, with the issuer also seen paying up versus euros. A covered bond analyst noted that a Leeds Building Society December 2018 issue trades at 105bp over Gilts, and that pbb’s deal also seemed expensive versus senior CMBS, a comparison he said is typically made by UK and US investors.

Nikolic said that the deal allowed pbb to satisfy sterling funding needs at a cost comparable to or better than what it would have achieved via a euro transaction, taking into account the cost of swapping it back into sterling.

In addition, he said that the Asian anchor order’s appreciation of the strengths of the Pfandbrief and it being comfortable with the ownership structure of pbb – 100% owned by the German government – were important drivers of pricing, with the concession, though small, to euro levels also appealing to investors.

A syndicate official close to the deal said that although there was some pushback from UK investors to the tight pricing versus UK covered bonds, but played this down in the context of the small size of pbb’s deal.

“We’re talking £250m deals rather than targeting £1bn trades,” he said. “There is diversification within these smaller deals, and you don’t have to purely rely on UK accounts.

“This was the extension of a private placement type deal driven by reverse demand.”

Further sterling supply from non-domestic issuers is likely to be limited, he said, given that not many euro issuers have sterling funding needs and that most would also need to match levels achievable in euros.

“A lot of ducks have to be aligned,” he added, citing spread levels and the cross-currency basis swap.

However, a covered bond analyst noted that a decline in sterling issuance as a result of a Bank of England/HM Treasury Funding for Lending Scheme is likely to support sterling issuance by foreign banks.

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He said that 13% of pbb’s mortgage cover pool comprises UK assets, and that he understood this to be the main driver for the issuer’s decision to tap the sterling market.

On the subject of pricing, a lead syndicate banker said that there is a strong technical bid in the seven year part of the curve, and also pointed to pbb’s deal offering relative value versus Kreditanstalt für Wiederaufbau, over which it offered a pick-up of around 35bp versus Gilts.

Pbb’s deal was in the market at the same time as a seven year unsecured deal for Sweden’s Nordea Bank, which priced £500m at 120bp over Gilts, 5bp tighter than guidance, on the back of around £1bn of orders, and some market participants suggested that the level on pbb’s deal was expensive relative to Nordea’s offering.

A lead syndicate banker said that the differential between pbb and Nordea in euros is around 40bp, and that with a 30bp differential on the issuers’ deals in sterling yesterday pbb’s transaction offered value.

Nikolic said that the leads were mindful of the adverse impact that Nordea’s deal could have on pbb’s transaction given that the two deals were targeting a similar audience, but that they felt it made sense to proceed with the covered bond.

“Quite a lot of work went into it and half of the book was ready,” he said, “and we had doubts but knew that we couldn’t be certain of having the anchor demand and a favourable basis swap at another time.

“The Nordea deal dragged away some demand but we had enough for the relatively small deal that pbb was targeting.”