Pohjola Eu1.5bn dual-tranche revives FRNs, hits ‘sweet’ 7s

Pohjola Bank priced a Eu1.5bn dual tranche senior unsecured deal on Monday that comprised a fixed rate issue in the seven year “sweet spot”, but FIG flow activity was otherwise limited this week.

Pohjola’s transaction comes after the Finnish issuer went on a roadshow following the release of its full year financial results on 6 February, and is the bank’s first euro benchmark since August last year.

The deal was one of very few to hit the market this week in the FIG flow segment, with LBBW the only issuer to sell a benchmark covered bond this week, a Eu500m deal with an unusual 15 month maturity.

Alex Sönnerberg, Nordic DCM origination at Crédit Agricole CIB, said that weaker demand for core covered bonds compared with that for peripheral issuance this year suggests investors’ appetite may be fading for core supply at prevailing spread levels, but that Nordic issuers should take heart from the reception for deals that hit the market last week.

“Following the Eu4bn of new deals last week, including strong five year issues from BNP Paribas and Helaba, Nordic issuers should feel much more confident in the level of demand for their covered bonds,” he said.

BNP Paribas Home Loan SFH priced a Eu1bn five year at 8bp over mid-swaps on the back of around Eu2bn of orders and Landesbank Hessen-Thüringen drew around Eu1.8bn of orders for a Eu1bn seven year deal.

“The covered bond market continues to provide a favourable backdrop for issuers to come to market, including those in core jurisdictions,” said Sönnerberg.

Norway’s Eika Boligkreditt (formerly Terra BoligKreditt) started a benchmark covered bond roadshow yesterday (Wednesday), and could test the market next week.

Pohjola’s dual tranche transaction comprised a three year floating rate note and a seven year fixed rate tranche, each for Eu750m. The deal was well-received, with more than Eu1.5bn of orders placed for each tranche, according to a syndicate banker at one of the leads — Bank of America Merrill Lynch, Barclays, and JP Morgan.

The FRN was priced at 36bp over three month Euribor, following guidance of the 37bp over area and initial price thoughts of the 40bp over area. The seven year tranche was priced at 67bp over mid-swaps after guidance of the 70bp over area and IPTs of the low 70s over.

Lauri Iloniemi, head of group funding at OP-Pohjola, said that the issuer opted for a dual tranche structure in response to clear demand for both floating and fixed rate supply.

“It’s been ages since we last did a FRN and we decided to go for both,” he said. “We achieved what we wanted to achieve and got more than 100 investors in each tranche and nice sized order books.”

He highlighted that there was more demand from Nordic investors than has usually been the case for Pohjola’s senior issuance. Nordic accounts took 35% of the FRN, and 54% of the seven year tranche.

Seven years is a “sweet spot” that several issuers have been hitting in the senior unsecured market recently, including Eu1.25bn and Eu1bn deals for Nordea and SEB, respectively. Sönnerberg at Crédit Agricole CIB said that seven years is a sensible maturity choice for Nordic issuers, with Nordea and SEB having recently priced tight deals in the 2021 maturity bracket.

“Investors pick up some 40bp in yield on the swap curve in seven years compared with five years, while many Nordic issuers’ credit curves are relatively flat,” he said. He noted that both tranches of Pohjola’s transaction have tightened in the secondary market.

“Given the strong correlation between re-yield and level of subscription lately, it was no surprise that Pohjola’s deal met with such strong demand, despite the bank being put on CreditWatch negative by S&P as a result of OP-Pohjola’s recent public tender offer for all the shares in Pohjola Bank,” said Sönnerberg.

“The book was very granular, with more than 230 accounts involved, and the fact that demand was evenly distributed between the fixed and floating tranches illustrates that there is good appetite for high quality Nordic paper across the curve.”

OP-Pohjola Group Central Cooperative, the central institution of the OP-Pohjola cooperative banking group, on 6 February announced that it is aiming to acquire full ownership of Pohjola Bank. Fitch and Moody’s affirmed Pohjola ratings after the takeover announcement.

A syndicate banker on Pohjola’s deal put the new issue premium on the seven year tranche at around 3bp-4bp. Five year issues that Pohjola priced in May and August last year were around 52bp over bid, he said, with the move along the yield curve to seven years worth some 10bp-15bp. The new issue concession on the FRN was around 1bp-2bp, he added.

Swedbank priced a US targeted $1bn five year senior unsecured issue last Thursday (20 February), three days after selling a Eu750m 10 year non-call five Tier 2. The senior unsecured deal was priced at 87bp over US Treasuries, with leads Barclays, Citi, HSBC and JP Morgan having built an order book of slightly over $2bn.

An official at the issuer said the deal was part of its normal funding programme, as part of which the bank targets two benchmarks a year each in the senior unsecured and covered bond markets, in US dollars and euros.