Berlin Hyp sold the tightest post-Lehman jumbo Pfandbrief yesterday (Tuesday) by ducking inside mid-swaps for a Eu1bn five year issue. It was barely oversubscribed and pointed to the limits of sub-Libor pricing, but those involved in the deal said it was still a success.

Berlin Hyp

With a re-offer spread of 1bp through mid-swaps, the mortgage issue was the first benchmark covered bond to hit sub-Libor pricing this year, after sub-jumbo deals from the issuer’s country peers in the preceding weeks had hovered close to, but not breached, the mid-swaps flat mark.

Münchener Hypothekenbank sold a two year public sector Pfandbrief at 20bp through on 26 November, but that was Eu500m versus Berlin Hyp’s Eu1bn.

Berlin Hyp’s deal was also the first jumbo Pfandbrief to hit the market this year, with five German benchmarks preceding it having been in the Eu500m-Eu625m range.

There was little sign this (Wednesday) morning of any other benchmark covered bonds being prepared for imminent launch, with a syndicate banker saying that market tone is weaker and that an issuance break might be beneficial.

“We’re far from expecting much of a pipeline,” he said. “There’s some profit-taking and some of the recent deals haven’t performed, so issuers would be advised to wait.”

However, he identified Scandinavian issuers as possible new issuance candidates for early February as they emerge from black-outs. Nordea, for example, reported its fourth quarter and full year results today. The basis swap for Scandinavian issuers is understood to have become more attractive for issuance in euros.

Leads Barclays, Crédit Agricole, JP Morgan, Landesbank Berlin and UniCredit collected just over Eu1bn of orders for Berlin Hyp’s deal, according to Bodo Winkler, head of investor relations at Berlin-Hannoversche Hypothekenbank.

The re-offer spread of 1bp through mid-swaps represents the wide end of initial price thoughts of the minus low single digits, with some syndicate officials away from the leads noting that the deal was a tough sell and that sub-Libor pricing may have deterred investors.

“BHH was very tight,” said one, “maybe even too tight.”

Berlin Hyp’s Winkler acknowledged that the transaction was slightly more sluggish than the issuer would have wished, but said that the outcome was an achievement.

“Of course we would have hoped for the deal be easier,” he said, “but we cannot be dissatisfied – it is the first covered bond in minus territory this year, and the first jumbo since Lehman Brothers in minus.”

It is difficult to know what impact the negative spread may have had on demand, he added, pointing out that Berlin Hyp’s deal featured a coupon in excess of 1% (1.125%), while the other five year benchmark Pfandbriefe that have been sold this year came with coupons of 1% or less, with interest rates having moved in the meantime. Aareal Bank, for example, which was the first Pfandbrief issuer to tap the market, sold a Eu625m five year at 1bp over with a coupon of 0.875% on 14 January.

“We would have thought that the higher coupon would reinforce the appeal of our transaction for investors buying on an outright spread basis,” said Winkler, “and while that may have been the case for one or the other, it wasn’t for all.”

The broader market environment should be borne in mind, too, he said, with declining risk aversion this year standing in sharp contrast to the risk-off mode that characterised much of last year.

A syndicate banker at one of the leads said that the aims of the deal were met, with pricing inside mid-swaps a success and justifiable from a fair value perspective in light of the issuer’s curve and secondary market levels for recently priced benchmark Pfandbriefe.

“Flat was never a consideration because we see minus as valid pricing for the credit,” he said.

However, he said that a limit had been reached on pricing, with minus territory representing a psychological barrier for some investors, also pointing out that Berlin Hyp’s deal offered a bigger coupon than other German Pfandbriefe that had been priced close to mid-swaps.

“I’m not sure you’ll see a more expensive issuer tapping the five year part of the curve,” he said.

The targeted Eu1bn deal size also had an impact on demand, suggested the syndicate banker, bearing in mind that sub-jumbo deals have become rather common in the German Pfandbrief market.

“It is per se somewhat more difficult to generate demand for Eu1bn issues, especially in five years where insurance companies are not active given that they are searching for yield and therefore go out to the long end or even prefer buying the periphery,” he said.

The timing of Berlin Hyp’s latest deal is linked to an upcoming redemption, according to Berlin Hyp’s Winkler.

“We communicated to the market since last autumn that we intend to replace the Eu1.5bn mortgage Pfandbrief maturity in February 2013 with a new Eu1bn five year no-grow jumbo close to the maturity date,” said Winkler. “In issuing the new jumbo we kept that promise.”

Germany and Austria were allocated 62%, the UK and Ireland 24%, France 7%, the Benelux 4%, and Switzerland 3%. Banks took 69%, funds 25%, and central banks 6%.