Lower Saxony lost half its book when it tightened a €750m 10-year to 2bp below mid-swaps on Monday, a cautionary tale for public sector issuers looking to take an aggressive approach in primary.
An abundance of liquidity has typically meant that borrowers are able to dictate terms in January as investors chase new issues. However, that dynamic may not play out in 2023 as the European Central Bank - a key support in recent years - looks to trim its holdings under the Asset Purchase Programme by €15bn from the beginning of March.
The laender had managed to get €1.8bn in demand for the early bird trade by the second update, but that halved to €900m by final terms, including some €250m of joint lead manager demand, with a syndicate banker calling the tightening “aggressive”. It came through KfW's curve.
Fair value lay at around 3bp below mid-swaps, the syndicate banker said, though a DCM banker away put the new issue concession at 3bp. This was tighter than the 7bp concession paid by Erste for a six-year covered bond on the same day that saw final books of €1.4bn, excluding JLM demand.
“For them, price was before size… It worked out okay,” the syndicate banker said. “It worked out not optimally… but still it was a good deal from [the issuer’s] perspective.” A €1bn deal at the same price would have been the optimal outcome, he said.
Lower Saxony’s final price came 1bp to 2bp through KfW’s curve, the syndicate banker said, a striking assessment given that KfW is by far the more liquid and the more desired name. However, the deal was looking slightly wider than KfW's curve the day following the execution, Tradeweb data showed.
“It’s the positioning," the syndicate banker said. "[Buyers] all were expecting a new 10-year KfW. It will not come, I can tell you. The issuer is not as keen as investors might be… So, the [10-year KfW] bonds widened significantly towards the end of last year.”
Certainly for now, it will not be a 10-year. The agency has mandated BNP Paribas, Deutsche Bank, JP Morgan and Morgan Stanley for a five-year benchmark expected to price on Wednesday. For investors wanting to buy 10-year paper, there will be some supply however. BNG is planning a 10-year social while Austria is also eyeing the tenor for a benchmark size.
As is typical, domestic German buyers provided the backbone of Lower Saxony’s interest, the syndicate banker said. Some French and Dutch buyers showed up for the deal, he added, but that segment of demand was the first to drop off when the issuer tightened.
Deutsche Bank, DZ Bank, JP Morgan, LBBW and NordLB arranged the new issue.
German sub-sovereigns last year enjoyed plentiful demand given the attractive spreads they were offering versus Bunds but that dynamic could change in 2023.
“Issuance levels will pick up again [from German regions], but not for all,” the syndicate banker said. “You need to become a bit more selective as an investor." He added that they should become more discerning about the prices German sub-sovereigns offer, rather than viewing all names in the segment the same way.
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