Arion welcomes real money buying of Icelandic euro comeback

Arion Bank on Tuesday sold the first public euro transaction from an Icelandic bank since the collapse of the country’s financial industry in 2008, a Eu300m (Ikr44.9bn) three year deal that Arion’s head of funding said met with encouraging real money demand.

Created out of the Icelandic operations of collapsed bank Kaupthing, Arion launched its first international offering in February 2013, a Nkr500m issue, while compatriot Íslandsbanki re-entered the international markets in 2013 with a Skr500m issue and in May 2014 sold a Eu100m private placement.

After receiving a BB+ rating from S&P in January 2014, Arion had set out on a roadshow ahead of a potential euro comeback in April 2014 but held off as conditions did not prove sufficiently attractive. However, after announcing its 2014 results on Wednesday of last week (25 February), the bank announced a global investor call and held two days of meetings in London.

Leads Citi, Deutsche and Nomura then began taking indications of interest on Monday and on Tuesday set initial price thoughts for a Eu300m no-grow three year senior unsecured transaction at the mid-swaps plus 325bp area. After taking orders topping Eu500m, they set guidance at 310bp-315bp and then set the final spread at 310bp on the back of a total book of over Eu650m.

According to a syndicate official at one of the leads, to arrive at the IPTs the leads first looked at where the Icelandic sovereign’s five year benchmark was trading — which was, he said, what investors were looking at — and interpolated to the three year maturity, which gave a level of 100bp-110bp over. They then looked at the kind of spreads paid by similar credits re-entering the market, such as Bank of Ireland or second tier Italian names, and put this at 170bp-180bp. These components combined to give a level of the high 200s, with the extra on top constituting a new issue premium.

The lead syndicate official noted that the bonds tightened 5bp on the day of launch.

“This a very important transaction, being our first benchmark euro transaction post-financial crisis,” said Eiríkur Magnús Jensson, head of funding in Arion Bank’s treasury. “It’s a positive step for all the issuers in Iceland that one of the major banks has accessed this market, and with the kind of backing we achieved.

“We got very good support from real money investors and we had 100 investors in the book, which was a positive surprise.”

Fund managers were allocated 56% of the deal, pension funds and insurance companies 15%, hedge funds 14%, banks 11%, and others 4%. Jensson highlighted the modest hedge fund distribution as positive.

“I believe this is quite unique for an issuer like ourselves coming back to the market,” he said. “What we have typically seen with such issuers is hedge fund participation of 40% or even higher.

“If you look at the quality of the investors in our transaction, it is just completely different. These are long term investors and the people that we want to build up a relationship with, so that was really good.”

Jensson said that the length of time Arion had spent preparing the transaction contributed to this.

“We went on a roadshow when we looked at the market last year and, although we just didn’t feel it was the right time at that point, we continued the dialogue with the investors,” he said, “so when it came to this transaction most of the people that we met were ones we had seen before so they were familiar with the credit and ready to take it on.”

Jensson said that Arion is now taking a path back into the mainstream capital markets trodden post-crisis by credits such as Bank of Ireland. The Irish lender re-entered the market with its first non-government guaranteed issue in November 2012 with a Eu1bn three year covered bond at 270bp over mid-swaps and soon followed this with a Eu250m 10 year Lower Tier 2 issue carrying a coupon of 10%, but this Monday sold a Eu750m five year senior unsecured benchmark at 100bp over.

“Every path is different, but this is the kind of steps that we see ourselves taking,” said Jensson. “Bank of Ireland is a different credit to us from a different jurisdiction, but it’s also a BB+. They’re at 100bp, we are at 300bp.

“Now, that has to converge somehow, and we would see ourselves approaching them.”

He said Arion does not expect to return with a further deal until at least after the summer, but that a five year maturity could be the next step, with the bank issuing perhaps once a year.