Germany powered towards a triumphant first conventional euro syndication on Wednesday as investors ignored the previous day's Constitutional Court ruling on Bundesbank participation in the European Central Bank's bond buying programme to rain down orders on its 15-year new issue.
The €7.5bn deal drew more than €35.5bn of demand, including €3.15bn of interest from the lead managers.
Despite this, the Finanzagentur debt management agency opted to only tighten the deal just 2bp from initial guidance to 22bp over the February 2030 Bund. At that level it yielded –0.303%.
There was a debate on the size of the premium. A banker at one of the lead managers insisted that the deal carried no new-issue premium compared to the post-announcement fair value. "That's something that only Germany could have achieved in this market," he argued, noting that the pre-announcement fair value was 20bp.
But a banker at one of the co-leads, a group comprising the 31 primary dealers that were not part of the five-bank lead manager syndicate, said that the deal came with a 3bp–4bp concession. He acknowledged, though, the calculation was complicated by older, higher coupon reference bonds.
One investor certainly thought there was a decent concession on offer. "While the NIP might appear miniscule compared to those that Spain and Italy have recently had to offer, it is a lot for Germany. It appears they wanted to be certain they achieved a solid book in this first issue, given the volumes still to come," said Gordon Shannon, a portfolio manager at TwentyFour Asset Management.
"Making use of syndication – something they may have to do more often – may be an indicator of this concern."
Germany's approach was aimed at maximising the deal's final size, a banker at another co-lead judged. The €7.5bn final figure included €500m retained by the Finanzagentur to support the bond's secondary market liquidity – a tactic it also uses each Bund auction.
The size also means the Finanzagentur has taken a good chunk out of the €11bn it plans to raise from syndicated deals in May and June.
While Italy and Spain had achieved larger deals recently, the lead banker argued that Germany had managed to achieve both size and decent maturity: hitting the upper end of its €5bn–€7bn "size aspirations" while also selling bonds longer than the recent 10-year sovereign offerings.
Germany's approach was "rather defensive", said the first co-lead banker, although that may have reflected the deal's narrow window, given the spate of public holidays last week.
European accounts dominated allocations, with German investors to the fore, but buying from the Benelux region, France and the UK were "very healthy", according to the lead banker, who judged that earlier fears of domestic appetite crowding other investors out had proved unfounded.
Central banks and official institutions were particularly present, with bank treasury asset/liability managers also featuring. "That much more diverse distribution is the true value of Germany incorporating syndication into its funding plan," the lead banker said.
COURT TURMOIL
The new issue came just 24 hours after the German Constitutional Court in Karlsruhe sent shockwaves through the eurozone government bond markets by giving the ECB three months to demonstrate that its public sector purchasing programme (PSPP) is proportional.
Without this the Bundesbank "may thus no longer participate in the implementation and execution of the ECB decisions at issue".
The ruling formed part of a broader judgement by the court which rejected a complaint against the ECB's asset purchasing programmes, including the PSPP, by a 7-1 vote.
SYNDICATION GOING GREEN?
The new issue showed that investors appear to have put the ruling to one side.
And Germany, which has increased its second-quarter funding target to €130.5bn as it seeks to combat the affects of Covid-19, will be back in the syndicated market well before the three-month deadline is up.
Until now Germany has only ever used syndication for non-standard products such as foreign currency and inflation-linked debt.
But it will tap the August 2050 Bund by syndication in June, while "further syndicates are possible in the second half of the year", according to the Finanzagentur.
"They're used to auctions where they can price around secondary levels. Hopefully we'll see more syndications coming through now," said a banker at another co-lead.
However, this is unlikely to include Germany's first green bond. The Finanzagentur has indicated that this landmark transaction, which will feature an innovative "twinning" with an otherwise identical conventional bond, is to be launched by auction in the second half.
"The structure is not necessarily something that the market has seen before, so it's something that they want to control," said the lead banker.
Overall, Germany is now to hold another 60 auctions this year (including 10 of inflation-linked debt). These are to raise a further €175.5bn of conventional debt and €3.5bn–€5.5bn of linkers.
Increasing supply is likely to weigh on Bunds generally, said Shannon. "Given the magnitude of the German government's stimulus programmes, longer term in my view this can only mean a higher cost of debt. Within the context of this happening throughout the world, I expect competition for capital globally will ultimately weigh on Bunds."
BNP Paribas, Bank of America, Credit Agricole, Commerzbank and HSBC were the leads on the new issue.
Additional reporting by Robert Hogg
