On the face of it, with low issuance and the ECB hoovering up bonds as fast as it can, you’d say that selling covered bonds this year hasn’t been that tricky. But selling covered bonds well is a different matter entirely. Tight valuations, a lack of benchmark issuance and negative yields all make sales difficult, but at the same time they all make the information that a good sales team can deliver more important to the whole covered bond value chain. And it is something that LBBW, GlobalCapital’s Best Bank for Distribution has focused on more than ever.
A lot of that valuable information this year has been about inflation perceptions. As Tarek Petzold, head of syndicate and private placements, puts it: “There have been a lot of inflation fears, so a lot of volatility particularly at the long end. That’s been a ‘stop/go’ market so good feedback from sales on when buyers are there and at what price has been important’.”
Another defining characteristic of much of the last year has been the tightening of covered bonds relative to the SSA sector. It’s another area where, according to Petzold, “knowing the investor is important. They need a new issue premium and we need to find out what that is from sales.”
The information flows two ways, with roadshows increasingly virtual, pre-marketing of deals has been compressed needing sales to communicate closely with investors to help them prepare for a transaction.
Whilst every covered bond bank talks to the big investors to gets this kind of feedback, one of the factors that differentiates LBBW, according to Petzold, is the long term nature of the relationship and LBBW’s coverage of “the tier two and tier three investors, not just the usual suspects covered by everyone”. Many things may have changed in the investor base for covered bonds, but German investors are still the ‘heart of the market,’ says Marc Just, head of FIG and SSA origination.
Another differentiating factor for LBBW is the long term relationships between sales and investors that has come about from LBBWs commitment to the market. As Just likes to say: “Covered bonds are in our DNA, we’ve been here for decades. We are not a new kid in town but an established player as an issuer and arranging deals for third parties.”
Long term relationships have had even more emphasis this year as we have all changed the way we work, with it being impossible to even meet most investors for the last 18 months. “In the virtual world, long term relationships are more important than ever,” says Just.
Covered bonds are in our DNA, we’ve been here for decades
A sector that LBBW’s sales team focus on, but which rarely gets the attention of the large, public deals, are the sub-benchmark deals – those from the medium sized and smaller issuers, more often than not from the Nordic or German speaking worlds, for whom a €500m benchmark is just too big. The investor base for these deals is quite different from that for benchmarks, delivering sub-benchmarks relies heavily on the reach into that largely German speaking, tier two investor base.
“In general, whenever market conditions are challenging or the placement of ‘off-the- run issues’ needs special sales attention, that’s when LBBW comes into its own,” explains Jan-Henrik Sandvik, head of FM product sales.
Similarly, with private placements and MTNs, margins in that sector are small, but, according to Just, “if it achieves the issuers’ and investors’ goals then it makes perfect sense”. With reverse enquiry so important in this sector and LBBW’s sales force so focused on the product “issuers feel that it is just as important to us [as the benchmark business]”. That isn’t the case at many of the other leading covered bond houses with their greater focus on the big ticket deals.
A big change in the ‘tier two and tier three’ investor base that LBBW pride themselves on is their growing interest in ESG bonds, an interest that matches LBBW’s overall focus on the sector. As Just puts it: “A couple of years ago investors would say they might look at a deal but don’t care if it is ESG.” But that has really changed, interest in the sector is on the fast track, another important trend that LBBW’s sales force can report back to DCM and issuers on.
The covered bond shelves might have been bare for large parts of the year, but if anything, that makes LBBW’s long term approach to the sector, and the benefits it can reap for the entire value chain more important than ever.