Hypo Noe Gruppe Bank took advantage of the CBPP3-induced rally to issue its inaugural mortgage-backed benchmark on Monday ahead of a Eu500m public sector-backed redemption next month, according to an official at the issuer, who added that covered bonds were a more attractive option given underperforming Austrian senior debt.

Leads Crédit Agricole, Deutsche, DZ, Erste and NordLB priced the Eu500m no-grow seven year issue at 7bp over mid-swaps on the back of almost Eu1.25bn of orders from close to 80 accounts. They had gone out with initial price thoughts of the 10bp over mid-swaps area and then guidance of 7bp-9bp.

Thomas Fendrich, head of group treasury, Hypo Noe Gruppe Bank, said that there were two factors behind the bank’s decision to come to market on Monday.

“The first point was that we have a bond out of the public sector cover pool maturing in October,” he told The CBR. “And the second one was the decision from the ECB on the covered bond purchase programme, which brings down the spreads more and more.

“Maybe in one month it will be much better, but for us this is ultimately the kind of level that we had before Lehman. There was also no competing supply this week and the investor feedback was very positive, so we decided it was a good time to come to market.”

Fendrich said that he was also mindful of the potential for the market to be disrupted should the bank have decided to wait in the hope of better spreads.

“Nobody knows what will happen with Ukraine, Russia, with the AQR, etc,” he said. “I wanted to have a smooth trade and the best timing to do it right now.”

The deal was seen as coming inside fair value, which was seen close to 10bp over based on Hypo Noe’s outstandings.

“I am totally happy with the trade because I think the level was fair,” said Fendrich. “We priced it inside of our secondary levels by 1.5bp or 2bp, so I guess that we can speak of a success. We also wanted to leave a bit of room for investors and we are now 2bp tighter.

“So by my understanding everyone can be happy with the transaction, we as an issuer and also the investors.”

The issuer did not hold a deal-specific roadshow for the inaugural mortgage-backed deal, but Fendrich said that it has spent a lot of time marketing its story with investors over the year. Hypo Noe received the rating for its mortgage covered bonds a year ago and he said that in the meantime the bank has been active issuing private placements.

Fendrich said that a covered bond was a better option than a senior unsecured issue because Austrian senior unsecured paper has underperformed.

“In other countries we saw spreads tightening in the senior unsecured area, too, but in Austria we haven’t seen that, so, I would say that the better way to go is in the covered format,” he said. “On the one hand, there was HAA, and on the other hand all these stories about Ukraine and the exposure of some Austrian banks to CEE.

“We don’t have such exposure like some of the bigger banks, but our levels were also affected. So we haven’t seen our spreads tightening, and that’s why we decided there is more downside momentum in senior unsecured than upside momentum for the moment.”

Senior will nevertheless play a role in Hypo Noe’s funding going forward.

“We want to come with at least one benchmark every year in covered format,” said Fendrich, “but it could be one year out of the mortgage pool and the other year out of the public sector pool. And the plan is also to be active on the senior side in the future.”

Germany was allocated 50% of Hypo Noe’s issue, Austria 20%, France 3.8%, Nordics 3.8%, the Benelux 8.8%, the UK 2.5%, Switzerland 1.3%, Asia 3.8%, and others 6.3%. Banks took 57.5%, funds 25%, insurance companies 5%, central banks and official institutions 6.3%, corporates 1.3%, and others 5%.