BRF covered benefits from bounce after slower Stadshypotek start

Jun 17th, 2016

BRFkredit sold a EUR750m seven year covered bond on Wednesday that bankers said was the most solid deal of the week, benefitting from a bounce in sentiment, after Stadshypotek sold a EUR1bn six year issue on Monday that was only just oversubscribed amid weaker conditions.

BRF300Market participants had earlier in June highlighted that, after a series of more productive sessions, the flow of euro covered bond issuance would become more irregular this week. They cited increasing event risk relating to a number of factors – including an FOMC policy meeting on Wednesday and next week the UK referendum on EU membership on 23 June, the announcement of the take-up of a new series of TLTROs on 24 June, and a Spanish general election on 26 June.

In spite of a weak market opening, bankers were nevertheless confident that conditions would still be supportive for covered bond issuance as Stadshypotek announced a euro-denominated benchmark five year issue on Monday morning.

“Last week I was bullish, and at first I had big hopes for Stadshypotek’s deal, but it seems the market is not as strong as we all thought it would be today,” said a banker. “We have been saying for weeks that covered bonds have been resilient to these risks, but apparently we are now working with lesser dynamics.”

Stadshypotek leads BNP Paribas, Credit Suisse, Deutsche, HSBC and Svenska Handelsbanken (Stadshypotek’s parent) launched the six year issue with guidance of 4bp at around 9:20 CET on Monday morning – skipping initial price thoughts to move ahead quickly, according to a banker at one of the leads. At 11:45 the spread was then fixed at 3bp on the back of books in excess of EUR1bn (SEK9.34bn), including lead manager interest.

Syndicate officials away from the leads said the response was underwhelming, noting that the book had developed slowly and that the 1bp of movement in the spread is less than had been observed in most recent trades. They also noted that the deal attracted more limited demand than Stadshypotek’s previous benchmarks. The new issue is Stadshypotek’s smallest euro-denominated benchmark issue since a EUR1bn seven year in October 2013, with each of its four euro benchmarks since sized at EUR1.25bn.

“The starting point looked sensible,” said a banker away from the leads. “But with so many headlines giving cause for concern, maybe some opportunistic investors that had been driving books are now being more cautious, and maybe others need a bit more spread on the table.”

Covered bond spreads across all jurisdictions have compressed in recent weeks, and bankers noted that Swedish spreads in particular had outperformed core and other non-Eurozone jurisdictions.

“Perhaps the spread compression we have seen between non-Eurozone and Eurozone covered bonds has also just become too much for investors, who do not feel like the spreads of the last weeks are compensating them enough for this increased risk,” said a syndicate official away from the deal.

The new issue is the tightest-priced euro-denominated benchmark covered bond from Sweden since June 2015, when SCBC priced a June 2022 issue at 2bp over mid-swaps. It was also priced with a 0.05% coupon. Only German issuers had previously issued benchmarks with coupons of 0.05% or less this year.

Syndicate officials at Stadshypotek leads said the deal had gone well given the Swedish issuer is not supported by the ECB’s covered bond purchase programme, and considering the yield and spread on offer, noting that it is the tightest-priced non-CBPP3 eligible benchmark of the year.

“That puts it in perspective,” said one. “Yes, it was a little slow, but if you factor in the yield and spread this deal offered I think it is quite a remarkable result.

“We’re pricing this just a few basis points back of comparable CBPP3-eligible paper, so you’re not going to get a two or three times oversubscribed book. Some accounts will think it is too expensive, but we didn’t need them.”

French issuer Caffil then followed on Tuesday, attracting EUR1.3bn of orders for a EUR1bn nine year obligations foncières issue with the benefit of being CBPP3-eligible, as conditions remained awkward, before BRFkredit on Wednesday morning announced its mandate for a euro-denominated seven year.

“Considering what has come before, BRF is the most solid, sound result of the three deals we have seen this week,” said a syndicate official away from Danish issuer’s leads. “In a difficult market, it looks like they were able to convince investors, including perhaps some new accounts, and take a larger size than they managed with their debut.”

Following a European roadshow that concluded on Tuesday, BRFkredit leads BayernLB, DZ, ING and Nordea launched the seven year issue at 9:30 CET on Wednesday morning with guidance of the 16bp over mid-swaps area. The leads then at 10:50 announced that the books were above EUR800m, with the spread unchanged.

The spread was then fixed at 14bp and the size at EUR750m (DKK5.58bn), on the back of books above EUR1bn, at 11:10. The book closed at over EUR1.1bn, with 85 accounts.

BRFkredit, a fully-owned subsidiary of Jyske Bank, launched its first euro benchmark covered bond in March, a EUR500m five year issue that attracted over EUR1.2bn of orders and was priced at 20bp over mid-swaps.

“After the inaugural in March, our best estimate was to issue the second benchmark in the fourth quarter of 2016, based on the idea of slowly extending the curve with another five year bond,” said Merete Poller Novak, director, head of debt IR and capital markets funding at Jyske Bank. “During spring, markets have, however, rallied.”

She said that, having observed its debut issue tightening and seeing increased issuance in the seven to 10 year part of the curve as yields fell, the group considered launching a longer-dated second benchmark ahead of schedule.

“Seeing the possibility of extending our curve into seven years – and getting a deal done before the summer break seemed attractive to us,” said Novak. “The market volatility increased over the last one or two weeks due to Brexit, but on the other hand there is a lot of cash still out there that needs to be invested, and in volatile markets covered bonds are safe heaven products.

“So we decided to move forward with the project as markets opened with a positive tone on Wednesday morning.”

Bankers said BRFkredit was able to achieve a more convincing result than Stadshypotek and Caffil in part because the market backdrop was more supportive on Wednesday, with European equity markets up between 1% and 1.5% and the 10 year Bund yield climbing back into positive territory in the morning, from a record low of minus 0.03% on Tuesday.

Syndicate officials said the deal also looked more attractive as BRFkredit was able to offer a double digit-spread, with Danish covered bond spreads not having compressed to the extent of Swedish spreads towards those of core Eurozone issuers.

Bankers said BRFkredit’s deal offered a new issue premium of around 5bp, seeing BRFkredit’s April 2021s at 5bp, mid, and noting that the average pick-up offered by more frequent Nordic issuers on their seven year paper over their five year paper is 3bp-4bp.

Novak added that the Jyske Bank group this time opted to go out with a “benchmark” sized deal, rather than a second EUR500m no-grow issue, in order to be able to give investors better allocation on their orders.

Banks were allocated 43% of the deal, asset managers 25%, insurance companies and pension funds 19%, and central banks and official institutions 13%. Accounts in Germany and Austria took 53%, the Nordics 29%, the Benelux 6%, Asia 3%, the UK and Ireland 3%, and others 6%.

Novak said that due to “very successful” growth in Jyske Bank’s home loan products, the group already has enough collateral to build a complete Jyske/BRFkredit euro curve over the next two to three years.

“We will not totally close out the possibility of a third euro covered bond this year towards the fourth quarter of 2016, but we might also wait until first quarter of 2017,” she said. “The most important message for us to send to the market is that we are here for the long run.

“We will build a euro covered curve and expect to issue approximately two benchmarks a year over the next couple of years.”

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