Berlin Hyp reopened the euro covered bond market after its summer break with a €500m no-grow five-year social Pfandbrief on Wednesday, showing the market is still in good health and leaving the door open for further ESG-labelled German supply.
The deal is the first euro benchmark covered bond in almost a month, with the last such trade – a €1.5bn five-year from Royal Bank of Canada – issued on July 18. Berlin Hyp, which also reopened the market in August following the summer break in each of the last four years, booked its slot at the front of the queue by announcing its mandate on Tuesday.
Leads Commerzbank, HSBC, LBBW, Societe Generale and UniCredit opened books on Wednesday morning with guidance of 10bp area over mid-swaps.
"When I first looked at the price, I thought it was not that interesting [for investors], but clearly I was wrong," said a banker away from the deal. "Starting at 10bp area, aiming for the mid-single digits – there are lots of other value propositions out there, but it went well."
"It's €500m no-grow, it's social, and all those little things help. The €500m no-grow size is clearly a good price lever."
After an early update indicated that demand had surpassed €1bn, guidance was revised to 7bp (+/–1bp WPIR) with books then topping €1.4bn. Demand continued to build, surpassing €1.8bn (excluding JLMs and pre-rec), allowing the leads to set the spread at the tight end of that range.
"All investors seem to be back and to have cash," said a banker at one of the leads. "Books were above €1bn pretty early and it was a very quick and smooth process. ... It was a good reopening."
Bankers said the result shows the euro covered bond market is picking up more or less where it left off a month ago, with deals attracting good demand but still having to offer some new issue concession.
Berlin Hyp's final book stood above €1.6bn (excluding JLMs). For comparison, the size of final order books for all euro covered bonds issued in July averaged €2.05bn, with final books for the four German deals sold that month averaging €1.65bn, according to IFR data.
The deal's 6bp final spread was deemed to incorporate around 4bp of new issue premium – roughly in line with the concessions being offered pre-summer – based on the secondary market trading levels of recent Pfandbriefe from other issuers. Some bankers said that older bonds on the issuer's own curve arguably pointed to a tighter fair value.
A lack of movement in secondary market spreads over the last few weeks also contributed to a sense of stability in the euro covered bond market, but bankers said that if issuance picks up significantly in the coming weeks, widening pressure will increase.
DZ Hyp is set to follow Berlin Hyp into the market on Thursday, after having announced a mandate for a €500m no-grow 4.5-year green Pfandbrief shortly after Berlin Hyp set final terms. DZ named Barclays, Deutsche Bank, DZ Bank, Helaba, Societe Generale and Toronto-Dominion as lead managers.
In the longer term, Bausparkasse Schwaebisch Hall is also expected to join the green covered bond market after publishing a green bond framework on Monday. In an investor presentation, the German lender said it has established a cover pool of more than €1bn of green assets to back green Pfandbrief issuance, adding that it expects that pool to continue to grow.
Bausparkasse Schwaebisch Hall's last visit to the euro covered bond market did not go well. The bank was forced to pull an attempted 10-year Pfandbrief in June after failing to attract sufficient demand.
"The relaunch of this project in a green format should increase the chances of success, as ESG issues usually appeal to a broader investor base and thus tend to be easier to place," said Ted Packmohr, head of financials and covered bond research at Commerzbank.
"Still, they do not guarantee covered bond issuers a substantial spread advantage and would not be a panacea for a general lack of buying interest. However, we believe that the latter should not be a problem this time, given the market recovery in July and the four-week pause in issuance that the benchmark primary market has experienced in the meantime."