Helaba raised a combined Eu1bn in five and 10 years yesterday (Monday), opting for the dual tranche format for asset-liability management reasons, according to an official at the bank, who added that recent volatility necessitated some spread concession but pricing inside mid-swaps in five years was a big success.

Landesbank Hessen-Thüringen (Helaba) last visited the euro benchmark market in October 2012 and wanted to tap the market with a potential covered bond benchmark before the summer break this year, Martin Gipp, head of funding at Helaba, told The CBR. In order to let some time pass after a recent deal for WIBank, the development bank of the German State of Hesse within Helaba, the issuer aimed for a transaction window sometime in mid to late June.

“The market environment is more challenging than it had been in the past few weeks, and conditions last week were poor,” said Gipp. “But yesterday morning it was felt that the environment was supportive enough to go ahead with a deal.”

The issuer went out with a dual tranche public sector Pfandbrief, marketing a five year tranche and a 10 year tranche, each capped at Eu500m. The five year was priced at 1bp through mid-swaps, following guidance of the mid-swaps flat area and initial price thoughts of the low single-digits. The 10 year tranche was priced at 13bp over, in line with guidance of the 13bp over area and initial price thoughts of the low teens.

Orders of almost Eu1.8bn were placed for the bonds, with demand skewed toward the five year tranche. Orders numbered 130 in total, with 115 different investors participating.

Gipp said that the recent volatility meant that a spread concession of a couple of basis points was necessary, and that managing to price the five year tranche inside mid-swaps despite this was an achievement.

“It’s very difficult to go through mid-swaps, so we see this as a big success,” he said. “The 10 year tranche was more difficult, but with a slight price concession we were able to ensure the success of the transaction.”

A syndicate banker on the deal said that the transaction got off to a slow start, but developed nicely thereafter.

“It’s rare that you get pricing in minus, but the order book allowed it,” he said. “We couldn’t tighten the spread on the 10 year tranche, but it was well subscribed.”

Dual tranche structures are not unusual in non-euro covered bond markets, such as US dollars, Australian dollars, Swiss francs and sterling, but they have become almost unheard of since the onset of the crisis.

Gipp said that the issuer opted for the format for asset-liability management reasons.

“We wanted to raise Eu1bn, and from an ALM perspective we had room for three, five, seven and 10 years,” he said, “so we decided to tap five and 10 years to minimise investor overlap between the tranches and to spread the Eu1bn across two maturities.

“And with only 11 accounts participating in both tranches this diversification was achieved,” he added.

The transaction was jointly led by nine banks – Citi, Commerzbank, Danske, DZ, Helaba, HSBC, RBS, Société Générale, and UniCredit – with the large size of the syndicate group coming in for criticism by some bankers away from the leads.

Helaba’s Gipp said that the large lead manager line-up was a function of the format of the deal, with the decision to go with a dual tranche structure effectively eliminating a potential mandate for a future benchmark.

“We have a lot of relationship banks with whom we work closely and we didn’t want to exclude anyone,” he said. “We decided to go ahead as if we were doing two separate deals and combine the syndicate groups. We try to rotate lead managers so even if we had done two deals separately it’s unlikely that the syndicate group would have been the same.

“And I have to say that the transaction was handled very smoothly, so the size of the syndicate group did not complicate matters.”

German accounts took 64% of the five year bonds, followed by central and eastern Europe with 13%, Asia 10%, Austria and Switzerland 5%, the Netherlands 4%, Denmark 2%, and the UK 2%. Banks were allocated 50%, funds 23%, central banks 22%, corporates 4%, and insurance companies 1%.

On the 10 year tranche Germany took 75%, the UK 8%, France 8%, Austria and Switzerland 6%, and Denmark 3%. Banks were allocated 61%, funds 22%, agencies 13%, insurance companies 3%, and central banks 1%.