Green helps BayernLB to Tier 2 landmarks

BayernLB achieved the tightest re-offer spread for a German euro Tier 2 benchmark when it sold the first green Tier 2 from the country on 16 June, a €500m 10.25 non-call 5.25 trade priced at 135bp over mid-swaps on the back of some 130 orders totalling €2.2bn. Miriam Scuka, head of strategic asset liability management at BayernLB, discussed the transaction and the group’s sustainable issuance strategy with Bank+Insurance Hybrid Capital.

What factors determined the timing of this €500m inaugural green Tier 2 transaction?

Our capital ratio is sound and well above regulatory buffers, and we also significantly exceed our MREL requirement, so we could afford to wait for the right moment to issue.

In fact, the main driver for the transaction was not regulatory, but related to Moody’s proposed adjustments to its Loss Given Failure (LGF) methodology, according to which the level of subordinated debt needed to shift the notching uplift in the matrix will be lowered. This new proposal allows us to optimise the benefits of the notching uplift within Moody’s matrix by calibrating the issuance of non preferred-senior and Tier 2.

As we were not in any hurry to issue, we prepared the transaction diligently and waited for favourable market conditions: Our impression was that a window before the summer break was feasible, and indeed the timing for the transaction was perfect.

Was there any particular reason for choosing the 10.25 non-call 5.25 structure?

From an issuer’s perspective, callable Tier 2 has some regulatory advantages versus plain vanilla subordinated debt. According to Article 64 of the CRR, the amount of Tier 2 must be amortised during the last five years prior to maturity. A call structure allows the issuer to optimise the regulatory recognition of regulatory capital, because there is no amortisation until the call date. In my opinion, investors have understood this regulatory background and recognise this kind of structure. Based upon this, I expect more and more issuers to come to market with callable structures for Tier 2 issuances in future.

Have there been any particular messages or themes you have focused on in your investor work lately, regarding BayernLB’s corporate strategy, sustainability strategy or anything else?

Our bank’s successful subordinated deal is the result of our many and varied efforts in the field of sustainable banking within the BayernLB group. Back in January 2021, we started marketing our sustainable finance framework, we then launched our green commercial paper programme — as one of the first such issuers in Europe — and other green and social bonds from the group followed.

The green subordinated bond rounds off our range of sustainable debt instruments, and makes the BayernLB group — BayernLB, BayernLabo and Deutsche Kreditbank (DKB) — one of the most active issuers in the sustainable segment in 2021.

How do you feel the transaction went? How do the pricing and distribution compare with your expectations?

The transaction was very well received by investors and represents several landmarks for BayernLB: the first public benchmark Tier 2 from BayernLB; the first euro green Tier 2 from a German bank; and the tightest re-offer spread for a euro Tier 2 benchmark in Germany. We were very pleased to see such a positive response from investors, and of course the final pricing was an excellent result for the bank.

Markets have been a little uncertain lately. Did this play into your decision to issue in green and/or the outcome?

From the very beginning, it was clear for us that if we were going to issue a benchmark this will be in green format. The quality of the assets of our green finance framework is excellent and we have realised that investors’ appetite for this kind of product is extremely high. By issuing a bond in green format, you reach a broader investor base, which helps both the issuer in the primary market, but also the investors in secondary market performance.

How does this Tier 2 issue fit into your funding plan and capital stack?

This transaction represents our third outing to the public debt markets this year, following our €500m green senior non-preferred issuance in February and our €500m covered bond in April. Our intention with those transactions is to diversify our investor base and promote our sustainable financing framework.

The subordinated green bond that we issued recently enables us to further increase our financial and regulatory flexibility, whilst optimising our cost of capital and strengthening our regulatory capital position. The main driver for the transaction was nevertheless to optimise Moody’s LGF analysis, as mentioned earlier.

What can you tell us about your funding plan for the year and how it is going?

We are almost done for this year, but are still open to private placements, although our approach to these is quite opportunistic in term of funding costs.

So far you have issued green bonds off your sustainable financing framework, with renewable energy as use of proceeds. What plans do you have for other asset categories and/or social bond issuance?

We are working on our portfolio and have already identified many new assets. I can imagine that in the future we will add transportation and real estate.

Are there any other aspects of the transaction or your strategy that you would like to highlight?

I really appreciated working with the joint leads. They were very focused and motivated, and this definitely contributed to the success of the this strategic transaction.

In terms of timing, if you are considering issuing capital, you should always do it when the market is favourable — not when you need it.