Covered Bond House
Reliably in front
Only one bank has maintained its position as a top underwriter of covered bonds over recent years, an achievement that was particularly impressive in 2009. For its consistency and leadership, and for bringing more new issuers into the fold than any other house, Deutsche Bank is IFR’s Covered Bond House of the Year.
The old adage goes that a jack of all trades will be a master of none. But Deutsche Bank has time and again proved itself to be a top underwriter in the covered bond market whilst spanning all parts of the spectrum.
Consistency and leadership is how Deutsche Bank describes its franchise. While other banks have climbed the jumbo covered bond league table ladder only to promptly fall back down with a thud, Deutsche Bank is the only house to have constantly maintained a top three position over recent years.
The bank ended the IFR awards season of the 12 months to mid-November 2009 as the second biggest underwriter of jumbo deals (excluding taps and self-led issues), with a market share of 12%. That had steadily increased from 7.6% between the same period of 2006 and 2007 and 9.6% between 2007 and 2008.
And Deutsche Bank ended the period as the number one underwriter in the all covered bonds league table where, excluding self-led issuance, it achieved a market share of 9% with an underwriting volume of €11.027bn over 40 issues.
But topping the league tables is only part of the story. It is easy to forget that the covered bond market was closed for months at a time and getting a deal through was often a luxury reserved for the privileged few.
Before the ECB performed its feats of magic in announcing its unconventional €60bn covered bond purchase programme, the collapse of Lehman Brothers triggered the longest market freeze since the creation of the jumbo sector. Conditions at the start of 2009 were fragile – so much so that some covered bond analysts were unwilling to predict potential jumbo issuance levels for the year. Some that did make a prediction said there wouldn’t be any.
But despite the frosty conditions, Deutsche Bank was active in lead managing new deals even when most of the investor focus was resolutely with government-guaranteed bank bonds, acting as a bookrunner for Deutsche Postbank’s €1bn 3.375% February 2014 mortgage Pfandbrief and for Eurohypo’s €1.25bn 3.75% March 2014 mortgage Pfandbrief.
It has also been a remarkable year for the covered bond asset class more broadly. The winter of discontent soon gave way to the green shoots of recovery in late April before the announcement from the ECB in May sent the primary market into free-fall.
September yielded its second busiest month since the inception of the jumbo market. At around €28bn, it far exceeded the supply from the first four months of this year, when investor demand only facilitated a mere €15bn of new supply. Despite the dreadful start, €111.9bn of jumbo covered bonds was issued between mid-November 2008 and 2009, according to Thomson Reuters, up 19% from €94bn the previous year.
Guiding new issuers
But the most noteworthy development was the record number of new issuers that have entered the market. During the awards year, 19 new borrowers made their debut in the asset class. Deutsche Bank was the principal driver of this trend, being appointed as a lead manager for more inaugural covered bond deals than any other house.
In underwriting 12 debuts, Deutsche Bank was a clear leader in expanding the number of issuing banks in this product, ending the period with a 17.7% market share for new borrowers – almost as big as the combined total for the next two leading underwriters of debut covered bonds.
“For us, it is important to bring new issuers to the market with sound preparation,” said Achim Linsenmaier, head of covered bond syndicate at Deutsche Bank. “It is not simply a case of ticking the box for another deal done, these issues show how much trust is put into a bank’s capabilities and, in this respect, our market share is significantly higher than anyone else’s.”
One notable inaugural deal was Deutsche Bank’s own long-awaited debut. Market feedback was unanimous that the €1bn 3.75% seven-year (June 9 2016) mortgage Pfandbrief, at mid-swaps plus 55bp, was a big success for the issuer. Not least for the punchy spread: at the time, the only other bank to have achieved a level close to this post-crisis was WL Bank, which managed plus 48bp for its five-year public sector deal. And with a book close to €5.5bn through nearly 180 single orders, the deal attracted the largest order book seen in covered bonds at that point in time.
Another highlight of the debut world was The National Bank of Greece, a deal also structured by Deutsche Bank. The €1.5bn October 2016 issue finally put the Greek jurisdiction on the map. Despite coming in the same week as two other high-profile debutants and despite the deal pricing very close its respective government curve, the oldest and largest bank in the Hellenic Republic attracted an outstanding book of €6bn from 150 accounts.
Other debuts lead managed by Deutsche Bank included UniCredit’s €2bn 4.25% July 2016 Obbligazioni Bancarie Garantite. The deal, which was only the second OBG out of Italy since the Italian covered bond law was established in 2005, attracted orders totalling nearly €3.9bn from 200 single accounts.
Deutsche Bank also acted as lead manager for the debut GE SCF €1bn July 2014 covered bond – the first ever transaction in the French covered bond market from a foreign entity and the first out of the GE group.
Though smaller in size, the €500m 2.526% November 2012 Lettres de Gage Publiques covered bond for Dexia – its first from the Luxembourg jurisdiction – was significant for the market. In addition to the deal being the first large-volume covered bond out of this region for some years, there were other challenges.
“What we learnt when preparing this deal was that investors had actually shut down credit lines, not only to the issuers in this specific jurisdiction but to the whole jurisdiction,” said Linsenmaier. “It became very important to guide investors through the legislation and re-establish access to that market.”
Returning falling angels
Deutsche Bank has also brought some long-standing absentees back to the market, including those with a more tricky history. And they don’t get much trickier than a bank rescued by German government.
As the first public benchmark covered bond from the Hypo Real Estate Group since its near-collapse in late 2008, Deutsche Pfandbriefbank’s new €1.5bn five-year Hypothekenpfandbrief pricing was an important test of investor confidence in the market. As one of Germany’s largest lenders of public and infrastructure finance, with one of the highest volumes of covered bonds outstanding, a successful rehabilitation was simply imperative.
In addition to the obvious challenges of being a restructured bank with a difficult history, the split Aa3/AA+/AAA ratings also presented a challenge for the issuer. But with an order book three times oversubscribed and a spread level deemed fair by market observers, the objective of a successful deal was certainly met.
Another example of Deutsche Bank bringing an issuer out of exile was the successful reposition of Corealcredit Bank, which priced its first mortgage Pfandbrief under its new guise from the former beleaguered AHBR. The €500m November 2013 deal had an even tougher challenge in being rated just AA– by Fitch. Despite falling so far away from the pole position of Triple A more associated with this asset class, the large-volume deal still achieved a spread of 47bp over mid-swaps.
Another tough deal was the first new covered bond for ABN AMRO for over two years and its first since its takeover by a consortium of banks.
At a time when investors are increasingly looking at the market from a top-down perspective – starting with the asset class as a whole, then the name, then the cover pool and jurisdiction – the return of such issuers marks a significant achievement.
Deutsche Bank is also the number one underwriter for large benchmark transactions, with a market share of 15.4% of covered bonds over €1.5bn.
No other bank has such a broad footprint in terms of single jurisdictions covered, is business extending far beyond its domestic market. Even when excluding both the core markets of France and Germany, Deutsche Bank still ranks number two in the league table with a 10% market share, having been active in Finland, Greece, Italy, the Netherlands, Portugal, Spain, Sweden and the UK. Its competitors cannot boast such breadth of coverage.
Deutsche Bank augments its leading primary business with its strong trading capabilities, where it has consistently ranked as one of the top liquidity providers in the secondary market. It quotes more than 400 covered bonds online and on its DABJ-Autobahn-system via three jumbo covered bond traders and one for classic Pfandbriefe. Deutsche Bank also provides one of the leading and well regarding research facilities.
Rachelle Horn
