Icebreaker
All-pervading uncertainty drove issuers to lean more than ever on trusted DCM advisers to read the market. For astutely and consistently clearing pathways for some of the most notable trades through the difficult market cycles of 2022, Landesbank Baden-Wuerttemberg is IFR’s Covered Bond House of the Year.
Euro covered bond issuance reached a record high of €207.825bn in 2022. But if that figure suggests an even, serene flow of trades through the year and an easy ride for issuers, the reality was very different.
Issuance windows slammed shut as easily as they opened and various challenges – including but not limited to rising rates, reduced central bank support and whipsawing relative value versus alternative asset classes – often made execution of covered bonds far from straightforward.
Drawing from its market insights and close relationship with investors, Landesbank Baden-Wuerttemberg cleared the path for a broad range of issuers, tailoring execution strategies and advising favourable timings on 97 trades – including five by LBBW itself – and in so doing dominated the league tables.
The German bank repeatedly hit the mark, achieving some of the tightest spread outcomes and highest levels of demand seen in the euro covered market throughout the year. The DCM team built three of 2022’s top five largest covered bond books, two of which were LBBW’s own trades.
Its read of the market led to landmark trades that at times went against the grain but worked for both issuers and investors.
Take a deal in March, when in the aftermath of Russia’s invasion of Ukraine, while most issuers stuck to a defensive maturity range of three to five years, LBBW guided Finnish national champion Nordea in the execution of a €1.5bn seven-year trade that reopened intermediate tenors for euro covered supply.
LBBW subsequently served as a bookrunner on 19 transactions that targeted the seven to 10-year bracket, in a year in which investor concern over the trajectory of rates often made accessing the longer end a fraught exercise.
LBBW showed a knack for picking unexpected but ultimately favourable windows, as illustrated by the timing of its own €1bn February 2028 green Hypothekenpfandbrief, which came in mid-July against a volatile background.
At the time, the covered market had been muted for a week with market participants either entering or preparing for the summer break. Nevertheless, the green HP breathed life into the sector and registered a 4.7 times subscription rate – one of the largest recorded for euro covered bonds in 2022.
ESG-labelled covered supply continued to expand in 2022 with a tally of €19.6bn for the euro sector, versus €16.5bn the previous year. LBBW contributed to its growth by supporting 13 euro ESG covered transactions, totalling some €8bn.
Among the pioneering steps the German bank has taken, its tapping of the ultra-short end of the curve in October stands out. With the aim of making the most of a strong bid for short-term assets in a crowded market, LBBW opened a new maturity channel with a €1bn two-year public sector Pfandbrief, a tenor rarely seen in recent years and which appealed to yield-hungry yet duration-averse investors.
The deal was more than five times subscribed, allowing LBBW to revise pricing by 6bp–12bp through mid-swaps, a spread that was the tightest on a euro covered bond in four years and which offered an attractive pick-up versus alternatives in the SSA market at the time.
The trade has been emulated many times in the months since, including by Bank of Nova Scotia and Federation des Caisses Desjardins, both of which picked LBBW to assist on their trades.
Through the course of the year, LBBW also facilitated market access for smaller issuers by working on 14 sub-benchmark trades, opened up opportunities for issuers new to the market with at least six inaugural deals and eased market re-entry for long-term absentees.
A recent example of the latter is CRH, which returned after two years and achieved size with a €1.85bn five-year in October when investors were being highly selective due to qualms over rates volatility. It was yet another successful trade and testament to LBBW’s leadership position throughout what was the covered bond market’s biggest year on record.
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