Ålandsbanken beats size target, turns to Sweden

Finland’s Ålandsbanken sold its largest single tranche covered bond on Tuesday, a Eu150m four year issue backed by a Finnish cover pool, and plans to return before year-end with a krona-denominated inaugural covered bond out of a Swedish cover pool.

After investor meetings earlier this month, leads Commerzbank and Danske began taking indications of interest (IOIs) on the Eu100m minimum four year deal on Monday afternoon with initial price thoughts of the 20bp over area. IOIs of close to Eu100m were taken and the books were then opened with mid-swaps plus 20bp area guidance on Tuesday morning, and a Eu150m deal ultimately re-offered at plus 20bp on the back of a Eu170m order book.

“We got exactly what we wanted and a bit more,” Heli Huhtala, head of group treasury at Ålandsbanken, told Nordic FIs & Covered. “The market is really good for all the banks who want to issue covered bonds because demand is much larger than supply. This is a result of two factors: it’s firstly the regulatory environment that we are living in, and then from the supply side it is the shrinking issuance.”

She said that, faced with the strong demand, the issuer was faced with the alternatives of either increasing the size from the Eu100m minimum or tightening pricing.

“As we now have a cover pool that we can use to have this financing, we thought that it’s better to replace part of the senior unsecured that we have with covered bonds and increase the issue size, so that’s the decision we made,” said Huhtala. “Some investors also do not like it when you aggressively tighten the pricing in the process.”

German accounts took 60% of the issue, the Nordics 27%, Switzerland and Lichtenstein 3%, Austria 3%, Asia 3%, the Benelux 3%, and the UK 1%. Banks and pension funds were allocated 40%, funds 28%, central banks and official institutions 23%, and insurance companies and pension funds 9%.

“We are a small issuer and to have 26 investors in the order book was really good for us,” said Huhtala. “Previously there have been fewer accounts, so we had a bunch of new names, and being able to diversify our investor base made us very happy.”

She said that the choice of a four year maturity helped attract the broadest possible range of investors.

“The larger investors typically prefer longer maturities at the moment, it appears, and slightly smaller investors prefer the shorter maturities, but then we wanted to have this really nice granularity in the order book, and we succeeded in doing that with the four year maturity,” said Huhtala. “There are some investors who don’t want to go beyond three or four years and those who would prefer maturities between five and seven years can be ready to do something a little shorter if there is extra yield.”

The issuer held investor meetings in Germany on 9 and 10 September and in Helsinki on 16 September, allowing time before its ultimate new issue to make sure investors had all the necessary information and for some to get credit lines in place.

Huhtala said that it was not easy to calculate the correct re-offer level, but that the level of 20bp took into account the smaller issue size on offer than benchmarks from other Finnish issuers and also incorporated a new issue premium.

“That is actually one problem that we have as a small issuer,” she said, “that our issues don’t trade frequently in the market, so if you are looking at the pricing on Bloomberg you are looking at something that doesn’t really exist. So what we do is compare ourselves with other Finnish issuers and perhaps some other smaller Scandinavian banks with similar ratings.”

Ålandsbanken is now planning for the fourth quarter another issue, in the Swedish krona market, out of a Swedish cover pool set up in the second quarter.

“The development in the bank has been such that the biggest growth in the business has been on the Swedish side, and so that is where we still might have funding needs in 2014 or early 2015,” said Huhtala.

“The cover pool SWE is in Swedish kronor and we need to hedge the currency risk totally under Finnish legislation,” she added, “so if we were to issue in euros then we would need to hedge that into Swedish kronor and it is a bit expensive.”