What were the main market dynamics across senior and covered bonds in 2024?
Both markets developed very differently. In spring and early summer this year, funding conditions in the covered bond market were very favorable for almost everyone. After the summer break, we saw demand decline and spreads began widening. This trend has only continued. There’s been quite a long period where we haven’t seen any issuance, and secondaries have repriced massively. As to what’s driving this, it’s nothing to do with investors having problems investing in covered bonds. Rather, European government bonds and SSA spreads have been moving wider, and there was so much pressure from these asset classes that covered bond curves widened as well. Senior unsecured was a totally different picture. Market conditions for the majority of issuers have been very constructive throughout the year. So looking at Berlin Hyps own curves, our senior preferred and non preferred are tighter than at the beginning of the year, whereas our covered bond curve is visibly wider.
What will be the key market dynamics issuers will have to contend with in 2025?
It seems quite likely that the pressure on rate spreads — including covered bonds — continues through the beginning of 2025. Although covered bond spreads have reached a level that I cannot remember being maintained for an extended period of time, I still cannot see them tightening in the short term. If covered bond spreads do not tighten, there is potential for senior spreads to widen in order to reach some kind of equilibrium. When it comes to the question of whether to issue in covered or senior, it always depends on the borrower’s business model. Berlin Hyp is a monoline real estate lender, and so for us anything that can be refinanced through covered bonds will be — so long as covered spreads are tighter than senior.
Berlin Hyp has been at the forefront of the covered bond market for many years. What are some of the standout developments?
It’s true we have a track record of establishing ‘blueprints’ for the market. In 2025, we will celebrate 10 years since Berlin Hyp became the first borrower to issue a green covered bond. The year after that inaugural green Pfandbrief we became the first bank to print a benchmark deal with a negative re-offer yield. Then in 2019, we were the first to show it was possible to print inside of the ECB deposit rate. In 2021, we were the first bank to issue a sustainability-linked deal, demonstrating how to approach an issuer’s ESG profile holistically and make it traceable for the market. Then in 2023 Berlin Hyp was the first to combine a social bond and green bond in a single dual-tranche transaction.
In 2024, we were in a fortunate situation in that we did not have large refinancing needs. In total we raised around €3bn across senior and covered bonds and we did all of this before September when spread widening gained momentum. Yet we showed that Berlin Hyp is still doing pioneering work in the capital markets, becoming the first commercial bank from Germany to use the Electronic Securities Act for a syndicated transaction. In August, we issued a €100m blockchain-based Pfandbrief — the first digital mortgage covered bond of a German issuer. That was an exciting adventure. The technology proved to be totally reliable and this will be another good ‘blueprint’ for others to follow in the future.
Given Berlin Hyp’s pivotal role in the green Pfandbriefe market, what implications do you think the current spread dynamics have for ESG covered bonds?
I think perhaps the more difficult the spread backdrop is for covered bonds, the more positive it could be for the ESG format. Because when you design a green bond, whether it’s covered or unsecured, there is always one feature of the orderbook — it’s larger. In times where markets are a little bit more rough, this additional demand is very helpful. In the past, I heard from many issuers who didn’t want to use green assets for covered bonds. They felt it was more difficult to place an unsecured deal in the market, and so they wanted to keep the valuable green assets for the more difficult product. But with spreads high, issuing a covered bond is no longer so straightforward. Issuers who would have been reluctant in the past to use green assets for covered bonds may now feel differently. Ultimately, my outlook for ESG covered bonds remains optimistic. The outstanding volume of green, social and sustainable covered bonds is still increasing year by year and that’s very positive.
