Berlin Hyp tapped by EUR250m a EUR500m five year Pfandbrief today (Thursday), eventually finding demand of some EUR400m while pricing in the middle of guidance, 23bp inside the spread it paid for a first senior preferred issue on Monday.

The tap comes shortly after Berlin Hyp issued the first German senior preferred bond, a EUR300m five year deal, inaugurating the country’s new legislative regime that came into force on 21 July.

The “jubilee” Pfandbrief was issued to mark Berlin Hyp’s 150th birthday in May. It was initially priced at minus 10bp.

Leads Crédit Agricole, Commerzbank, DZ, LBBW and UniCredit reopened the May 2023 deal this morning with guidance of the minus 10bp area for a tap size of EUR250m, taking the deal to a new total size of EUR750m.

One and a half hours later, the spread was fixed at minus 10bp with books above EUR250m, including EUR45m joint lead manager interest. The final book stood at EUR400m, including the EUR45m JLM interest.

“It looks like demand was slow to build, which can happen with these sub-benchmark taps,” said a syndicate banker away from the leads. “Eventually it grew after they said they would go no tighter, and the book looks decent in the end.”

Bankers said the tap offered a new issue premium of around 2bp, seeing the Berlin Hyp May 2023s trading at minus 12bp, mid, pre-announcement.

Berlin Hyp’s EUR300m five year senior preferred deal was priced at 13bp over mid-swaps on Monday, 23bp above today’s EUR250m five year covered bond tap.

Commerzbank followed Berlin Hyp into the newly opened senior preferred market on Tuesday to print a EUR2bn dual tranche deal that attracted combined demand of over EUR5bn. A EUR1.25bn five year tranche was priced at 35bp over mid-swaps and a EUR750m 10 year tranche at 65bp.

Analysts at Commerzbank said the first instances of German senior preferred issuance demonstrate that Pfandbriefe should remain an attractive funding instrument for German banks compared to the new bond class.

“Although German spreads are also quite tight in the unsecured segment, the new issues have been priced more defensively compared to Pfandbriefe and non-preferred bonds than is usual in other countries,” they said. “Even if we assume a certain entry premium for the new product, a sufficient spread gap between senior preferred and Pfandbriefe should thus remain, meaning that issuance of the latter should remain worthwhile even when taking into account the additional costs associated with Pfandbriefe.

“This is all the more true if we also consider the non-monetary advantages of secured funding, such as the greater crisis resistance and spread stability of Pfandbriefe.”

The analysts said the impact of new senior issuance on German bank’s funding needs could reduce covered bond issuance in the near term, but that they do not believe the new product will stifle Pfandbriefe in the long term.

Amid the inauguration of the new senior preferred market, German issuers have remained active in Pfandbriefe, with Aareal and Deutsche Pfandbriefbank printing EUR500m deals on Tuesday and Wednesday, respectively.