On Tuesday, a €500m 10 year mortgage Pfandbrief from Bausparkasse Schwäbisch Hall (BSH) was pulled several hours into bookbuilding and after the spread had been set at 21bp over mid-swaps.
While undoubtedly a difficult decision, in this situation pulling the deal was the right option.
The leads had thought a 6bp pick-up over a host of recently issued Pfandbriefe would entice investors into the order book.
But the portents were ominous when LBBW — a larger issuer for which investors would have greater credit line availability — struggled to issue a €500m 10 year public sector Pfandbrief the day before at 19bp over swaps.
All of a sudden, BSH — at a 2bp pick-up to LBBW — was no longer as appealing.
The decision to pull the trade stood in contrast to a competing €500m five year from Hamburg Commercial Bank (HCB), which got done but where the leads were said to be left holding 40% of the deal.
Their willingness to hold the position reflected the lower risk of the shorter duration of the bonds meaning they had greater leeway to place the remaining paper.
BSH’s 10 year presented a greater risk to the dealers, making it more difficult for them to hold the bonds for any length of time. And with less room to manoeuvre, the risk of spread underperformance was that much greater, which could have had a knock-on effect on the wider market.
The shaky state of the covered bond market magnified that risk.
At €136bn so far this year, covered bond volumes are at a record level and investors want a break, especially as there could well be more bonds in public circulation as the ECB unwinds its years of support to the asset class.
A €477bn repayment of the ECB's Targeted Longer-Term Refinancing Operations is due next week and a complete withdrawal of the European Central Bank’s bid is expected from July.
There is a growing body of opinion that funding conditions may get worse before they improve. Fewer unsold bonds looking for a home makes BSH’s bold decision one less thing for the market to worry about.