HSH Nordbank placed a Eu500m three year public sector-backed deal yesterday (Wednesday) benefiting from the support of its traditional investor base and a lack of supply, according to an official at the bank, which is looking with interest at structured covered bonds.

Leads Commerzbank, DZ, HSH, RBS and Société Générale priced the issue at 11bp over mid-swaps, after having gone out with initial price thoughts in the low double-digits area.

Christoph Christensen, head of strategic treasury at HSH Nordbank, said that HSH executed an “excellent transaction” in “a very smooth process”, benefiting from the support of its traditional investor base and the lack of competition deriving from the limited supply of recent weeks.

“The market was ours,” he said.

Christensen pointed out that HSH’s deal was the first Pfandbrief benchmark since the end of January and after the market disruption that followed the outcome of the Italian elections.

Some syndicate bankers away from the leads said that the pricing seemed wide for a Pfandbrief issue, with some questioning investor interest for covered bonds backed by public sector assets.

Christensen said that the transaction was very well received by the market and had orders in excess of Eu725m from 48 investors dominated by the issuer’s strong German investor base and also some notable European and Asian accounts.

“The size of the order book would have allowed for a tighter pricing, but we did not want to ‘squeeze’ investors in the middle of the transaction, and decided to price the transaction in line with guidance,” he said.

Christensen said that at 11bp over mid-swaps, the deal was priced consistent with HSH’s secondary curve.

Christensen added that there is good demand for public sector covered bonds, which are supported by scarcity value given a negative net supply – as the amount of redemptions outstrips new issuance – and the good quality of HSH’s collateral, consisting of 90% German and Austrian assets.

The three year maturity was targeted as a result of good investor demand for the tenor, and because it “fit perfectly” HSH’s cover pool, said Christensen.

German accounts took 78%, Austria and Switzerland 6%, Nordics 4%, France 3%, Benelux 2%, Asia 6% and UK and Ireland 1%.  Banks were allocated 44%, asset managers 38%, central banks and agencies 13%, insurance companies 3%, and corporates 2%.

The deal is HSH’s first euro benchmark transaction since June 2012 and its first euro public sector Pfandbrief benchmark since June 2010, according to Christensen.

He said that HSH could tap the euro covered bond market again in 2013, probably with a mortgage Pfandbrief.

“We have sufficient cover assets for a mortgage covered bond in benchmark format for the remainder of 2013,” he said. “But whether it will be issued on the public market or as private placements will depend on investor sentiment and market conditions.”

It emerged in October that HSH can include in its public sector cover pool SME loans that have been made eligible by being guaranteed by German agency KfW (see here for previous coverage). More recently, Commerzbank on 21 February issued a landmark structured covered bond backed by SME assets.

Christensen added that a structured covered bond could, depending on market developments and whether it establishes itself as a standard product of high quality, become an interesting issuance format for HSH.

“HSH has a broad diversification of refinancing sources”, said Christensen, “including excellent access to the German Savings Banks Finance Group and their retail clients, and as an established Pfandbrief issuer with three cover pools.

“Nonetheless, we follow with interest market discussions such as those around structured covered bonds.”