Deutsche Hypo issued a Eu500m no-grow mortgage backed issue yesterday (Monday), choosing the seven maturity to provide a yield pick-up, according to an official at the issuer. The bank will not target a triple-A Pfandbrief rating despite an upgrade of its issuer rating, he added.

Jürgen Klebe

The deal is the issuer’s second benchmark covered bond of the year, coming after a Eu500m five year in January, and contributes to satisfying a Eu5bn funding need, Jürgen Klebe, deputy head of treasury at Deutsche Hypothekenbank, told The Covered Bond Report.

The transaction was modestly oversubscribed, with 36 accounts placing orders worth some Eu600m in total.

German investors dominated the order book, accounting for 69.5% of allocations, followed by Asia with 10%, Austria 7.5%, the Benelux 7%, and France 6%. Banks were allocated 67%, funds and asset managers 21%, central banks 11%, and insurance companies 1%.

Klebe said that the issuer decided to tap the seven year part of the curve because it allows for at least some degree of yield pick-up in the German Pfandbrief segment.

“That this is a requirement of sorts is something that we clearly picked up on from our roadshow activity,” he said. “The minus area is a no-go, that is clear.”

Leads BayernLB, Crédit Agricole, Commerzbank, DZ Bank and NordLB priced the deal at 5bp over mid-swaps, in line with guidance of the 5bp over area and initial price thoughts of the mid-single digits.

Klebe noted that at 5bp over, the deal was priced inside the issuer’s private placement levels.

The timing of the transaction was in part influenced by a feeling that there is a decent deal pipeline, he added.

“The longer you wait the more chance there is that you come up against competing supply,” he said.

As it was, Deutsche Hypo provided the only FIG supply yesterday, amid fragile market conditions. In SSAs Landesbank Berlin was in the market at the same time, with a Eu1bn 10 year at 10bp over.

Not long after Deutsche Hypo announced the mandate for its Pfandbrief on Friday, its issuer rating was upgraded from Baa2 to Baa1 by Moody’s. The rating action was prompted by the rating agency’s view of an increased probability of support from NordLB, Deutsche Hypo’s parent, following conclusion of a domination and profit and loss transfer agreement. Deutsche Hypo’s “strategic” role within NordLB as the centre of competence for real estate lending and an issuer of covered bonds also fed into the Moody’s upgrade.

The bank’s Pfandbriefe are rated Aa2, which is below an Aa1 rating that would already have been achievable under Moody’s Timely Payment Indicator (TPI) framework based on the previous issuer rating. The maximum achievable covered bond rating has increased to Aaa as a result of the issuer upgrade.

Despite the top rating being within the issuer’s grasp Klebe said that the issuer will not target a triple-A rating.

“The bank thought long and hard about what covered bond rating to target, and we settled on Aa2 because it is a really good quality rating that always generates good investor demand, domestically as well as internationally,” he said.