Rating: Aaa/AA+ Amount: Eu1.5bn global bond, Öffentlicher Pfandbrief series P4011
Maturity: June 19, 2008
Issue price: 99.645
Fixed re-offer price: 99.47
Coupon: 5%
Spread at re-offer: 27bp over the 4.75% July 2008 Bund
Launched: Tuesday June 11
Joint books: Barclays Capital, Deutsche Bank, HypoVereinsbank
Borrower's comment:
We issued a mortgage Pfandbrief, which launched at 10.5bp over mid-swaps.
The deal had a pot structure with 70% of the paper allocated to the leads, and 30% to the co-leads and the selling group. We saw a very strong performance from the co-leads and the selling group.
Geographically, around 31% of the paper went to Germany and the rest to Europe, Asia and the US. Major orders came from Italy, the Benelux and France. About 7% went to the US, which is a fairly considerable amount, since the last time we issued in February we had only a few orders from the US.
One of our aims is to broaden our investor base. HVB Real Estate Bank is the result of a merger between three smaller banks. Its focus used to be towards Europe, and in particular Germany. We now want to attract more investors from abroad, including Asia. The wider the investor base, the better the pricing of the bonds. This deal was also interesting because we had a fair amount of interest from European corporates.
When launching a deal a borrower can take one of two approaches. It can either be opportunistic and concentrate on getting the maximum funding volume at the tightest pricing levels, and ignoring investor demand. Or, the borrower can concentrate on how the bond will perform in the secondary market and on encouraging investors to come back again.
We decided to adopt the second approach because, with investor demand for our issues increasing, we expect in the medium term to achieve substantially better funding levels. So, although the issue size talk was Eu1.5bn to Eu2bn, we decided we would price according to demand. We had an order book of Eu1.7bn, not enough for a Eu2bn bond, so issuing Eu1.5bn ensured a strong performance.
We have no plans to issue in the immediate future. The market will have a summer break and because HVB Real Estate Bank has no great need for a sizeable amount of funds we will concentrate on private placements, rather than jumbo issues.
Bookrunners' comment:
This was not an easy bond to price and launch. At the beginning, the borrower talked about a transaction in the range of Eu1.5bn to Eu2bn, but ultimately HVB plumped for Eu1.5bn to guarantee a good secondary performance.
The scaled-down size of the deal is a message highlighting the difficulties of the Pfandbrief market at the present time.
The deal was launched at Euribor plus 10.5bp at re-offer, which is cheap for the sector.
Investor demand came mainly from Germany, Italy and Scandinavia, and across the rest of Europe. And there were some smaller orders out of the US. But there were very few new money accounts, with lots of switches from old HVB paper.
We will see how the paper performs in the next few days. The cheapening of the bond will not continue because investors need to cover their short positions. We will see a tightening of these bonds and the whole sector should pick up a little.
Market appraisal:
"...pricing was generous, but in line with the borrower's last two or three issues which have been priced to sell. It is not easy to place Pfandbriefe because of the recent downgrades and because the market is fairly saturated with paper.
Everything went very smoothly and we saw fairly good demand across Europe and a little in the US. To have interest from across the Atlantic is fairly unusual and probably due to the six year maturity, in contrast to the usual 10 year tenors, and the double digit coupon.
"...the deal went rather slow at the beginning, despite the generous pricing, but we saw a sprint in the past few days.
At launch, interest in the deal came solely from investors in Germany, but orders have now come from Austria and the Benelux as well.
The bumpy start was due to poor market conditions caused by the two notch downgrading of AHBR, which was like an earthquake for the market. There are no signs that investor confidence in Pfandbriefe is increasing and the potential downgrade of HVB is casting a lingering shadow. If HVB is downgraded the Pfandbrief market will most likely experience a three month break, but there are no indications as to when a decision on a potential downgrade is likely to be made."