Aktia: Out on the street again

Aktia has roadshowed its new Aktia Bank plc covered bond programme and Crédit Agricole CIB senior covered bond analyst Florian Eichert explores the differences between this and previous Aktia Real Estate Mortgage Bank covered bonds.

CA-CIB has been mandated as lead manager for the first deal off the programme.

For all of you who have met Aktia in the past in the person of Timo Ruotsalainen (and the guy is hard to miss if he stands in front of you as he is rather on the tall side) and are now asking, which new programme? here is a quick reminder:

• The issuer in the past was Aktia Real Estate Mortgage Bank (AMB).
• Because of a difference of opinion with Moody’s regarding the rating of AMB and therefore its covered bonds, the issuer will now be Aktia Bank plc — the biggest shareholder in AMB. The Aktia Bank plc programme will be the one used going forward, while the two old AMB programmes will be run down over time.
• As such, even though at first glance the two sound the same and the guy showing up will be the same, too, we are actually talking about a new programme, a different pool and different (as in higher) ratings.

The new issuer will be Aktia Bank plc

The issuer will be Aktia Bank plc, 49.9% owner (with 70% of voting rights, though) of AMB, the entity that issued Aktia covered bonds in the past.

As mentioned, AMB was only part-owned by Aktia, and that was where the trouble with Moody’s came from. The agency did not give too much credit to the other owners, which are unrated by the agency. As a result, the implicit rating of AMB was significantly below that of Aktia Bank plc (a guesstimate is around three notches lower, at Baa3) and, while covered bonds issued by Aktia Bank plc can achieve a Aaa rating from the agency, those of AMB were downgraded to Aa3, which is well below the other Finnish issuers’ programmes. Aktia tried for quite some time to come up with a solution between the other co-owners and discussed various strategies at length, from liquidity guarantees to ownership changes, without reaching a satisfactory solution.

Ultimately, Aktia decided to set up a new programme at the level of Aktia Bank plc and to let the old AMB programme run off over time.

Programme/Ratings

The new programme is based on the Finnish covered bond law. The main cover asset type will also be the same as AMB’s — Finnish residential mortgages. The only difference structure-wise that we can see from going through the pre-sale report from Moody’s is the maturity structure. According to Moody’s, the new programme will have a 12 month soft bullet whereas the AMB ones have hard bullets.

With Aktia Bank plc being rated A3 by Moody’s and the covered bond programme having managed to get a TPI of Probable-High (the same as most of the other Finnish programmes), the new covered bonds have the ability to be rated up to Aaa. Moody’s has already given a provisional Aaa to the programme. The old programme’s Aa3 covered bond rating in combination with the same Probable-High TPI would indicate that Moody’s internal rating for AMB is three notches below Aktia Bank plc, at Baa3.

With the current A3 rating of Aktia Bank plc, the covered bonds have no TPI leeway left. Should Moody’s turn the negative outlook into a downgrade, the covered bonds would drop by the same number of notches as the issuer.

Aktia Bank plc cover pool info

We have preliminary information on the pool from the issuer and Moody’s has used this info to calculate its usual metrics:

• Based on Moody’s collateral score, the new programme will be a touch weaker than AMB’s (collateral score of 6.3% vs 5%).
• The main difference as far as we can see at first glance is the slightly higher LTVs for the new programme and the somewhat shorter seasoning. To us this is only natural, though, as many of the old mortgages were refinanced through AMB, which means that the new programme will have a slight tendency towards younger loans, which tend to have the higher LTVs as borrowers have not been repaying as long as older vintage mortgages.

What will happen to the old programmes?

AMB currently has two programmes outstanding (Pool 0 as well as Pool 1). The old programmes will continue to exist as long as there are bonds outstanding. They will no longer be used to actively fund new business. All parties involved have committed themselves to maintaining the quality of the programme, however:

“All owners are fully committed to safeguard the high quality of the existing cover pool and ensure that Aktia Real Estate Mortgage Bank continues to satisfy capital and liquidity requirements.”

The old programme will also still be able to issue covered bonds if necessary to bridge ALM mismatches, but the focus with regard to funding new mortgage business by Aktia will be on the new Aktia Bank plc programme.

Where should the new covered bonds price relative to the old ones?

Compared to the old outstanding AMB programmes, the new programme by Aktia Bank plc will have:

• The better rated issuer
• The better rated covered bonds (Aaa vs Aa3)
• A fairly similar (as in Finnish residential mortgages) but somewhat weaker pool, at least initially (collateral score of 6.7% vs the 5% of the old AMB programmes)
• A soft bullet vs a hard bullet maturity structure

To us, the new programme clearly beats the old AMB programmes and should thus price tighter. The somewhat weaker pool for now (it is just being built up and could close the gap to the AMB Pools 0 and 1 going forward, in our view) and the different maturity structure (hard vs soft) are not enough to outweigh the better issuer, higher ratings as well as the status of an “actively used programme”, which is good for liquidity. At some point there will be investors trying to arbitrage away the difference between the old and new programmes to some extent (this is what happened to the static covered bond programmes within French BPCE group, for example) but initially there will have to be a few basis points between them.

In the past, AMB’s covered bonds have always traded at a pick-up versus the other Finnish programmes, of between 10bp and 15bp depending on maturity. Aktia Bank plc’s covered bonds, despite the advantage over AMB’s programmes, will still have to pay a premium over the likes of Nordea as well as Pohjola, in our view. After all, the latter two issuers are still rated in the double-A space. Aktia Bank plc, while clearly being in better shape rating-wise than AMB, still has only A-/A3 ratings from Standard & Poor’s and Moody’s, which in addition to this are on negative outlook.

Taking all of these arguments into account and considering the fact that Aktia Bank plc is essentially a new issuer, we consider that a five year debut deal should currently be around the level of AMB’s current 3Y. After the slight widening in recent days in covered bond markets, this would put a new issue in the region of 12bp-15bp, which would mean a pick-up of around 7bp-10bp versus the other big Finnish issuers.