How low can you go?
While many issuers in the covered bond market sought to avoid negative yields by printing with longer tenors, Berlin Hyp adopted the opposite approach selling a short-dated deal that achieved the lowest ever yield in the sector. The landmark €1bn 0.01% three-year note, issued in August, priced at a yield of minus 0.588%, which was through the European Central Bank's deposit rate.
"The market environment was a strange one," said Bodo Winkler, head of funding and investor relations at Berlin Hyp. "Every day you looked at the screens and saw new lows. For a positive yield you had to issue in tenors of 30 years and over."
The deal was introduced to a market with record low swap rates and a break in supply with most participants on their summer holidays.
Covered bond issuers had been increasingly looking at longer maturities to avoid negative yields but having already issued in maturities of eight and 10 years earlier in the year, Berlin Hyp needed shorter-dated paper to match its lending, the average length of which is seven years.
Leads BayernLB, Credit Agricole, Commerzbank, JP Morgan and UniCredit brought the trade with a fixed guidance of mid-swaps flat to minus 2bp and priced at the tight end on a book of more than €1.15bn, driven by bank treasuries.
The trade provided proof that the market would take to shorter dated covered bonds in a deeply negative environment.
"This really opened the market for covered maturities under five years," said Roberto Anaya, a syndicate banker at Commerzbank.
Most investors bought the deal on an asset-swap basis, which provided a positive carry.
"If you swapped versus three-month Euribor it produced a carry of 5bp and if you swapped against Eonia it was 13bp," said Winkler.
The pricing approach of fixed guidance gave investors as much certainty as possible from the start on the yield.
"The issuer demonstrated a consensual and unusual approach," said Vincent Hoarau, head of FIG syndicate at Credit Agricole. "The formal guidance from the outset was very much appreciated, something nobody had done in the recent past."
The trade also brought an international book, attracting the largest share of foreign investors to a German euro Pfandbrief since the financial crisis with only 41.5% of allocations going to Germany.
Underlining Berlin Hyp's position as a leader in the market, the deal encouraged other covered bond issuers such as Deutsche Hyp, Muenchener Hyp and UniCredit Bank to print with short-to-medium maturities.
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