BRFkredit in ‘unique’ Eu500m debut, plans Q4 return

BRFkredit sold a debut, Eu500m five year covered bond on Wednesday, and plans to return to the euro market in the fourth quarter and establish itself as a frequent issuer therein, with an official at the issuer citing the benefits of diversification away from the Danish market.

BRFkredit, a Danish mortgage credit institution wholly owned by Jyske Bank after a merger in April 2014, began marketing its debut last week, holding investor meetings across Europe, before announcing a mandate on Tuesday afternoon.

The deal was launched into a busy market on Wednesday, with Axa Bank Europe and Crédit Agricole also in the market with benchmark deals totalling Eu4bn, but bankers noted BRFkredit’s deal was quickly twice subscribed.

“There were some pretty eye-catching deals out there yesterday, and that might have distracted from BRF slightly,” said a syndicate official. “But they should take credit for a strong debut.”

Leads BNP Paribas, Danske, LBBW and UniCredit launched the Eu500m (Dkr3.73bn) no-grow five year issue at 9:30 CET with guidance of the 22bp over mid-swaps area, before revising guidance to the 20bp area on the back of books “well in excess” of Eu1bn within one hour. The deal was then re-offered at 20bp, with the book closing in excess of Eu1.2bn with 58 accounts at 10:45.

“It went amazingly well,” said Merete Poller Novak, head of debt IR and capital markets funding at the Jyske Bank Group treasury. “The book built so rapidly.

“We were furthermore utmost pleased to see both new investors – many that we met during the roadshow – as well as old acquaintances in the order book.”

Banks were allocated 45% of the deal, fund managers 30%, central banks and official institutions 16%, insurance companies and pension funds 8%, and others 1%. Accounts from Germany and Austria took 63%, Denmark 14%, other Nordics 14%, Switzerland 3%, France 2%, and others 4%.

Novak said that the size and quality of the order book would comfortably have allowed BRFkredit to price the deal tighter than 20bp, but said the issuer decided against this.

“We briefly considered going to 19bp, as a compromise between what we as an issuer wanted to communicate to investors and what was clearly on the table with the size and quality of the book,” she said. “However, we as an issuer finally took the maybe unusual step of telling leads we wanted to stick to 20bp, thus definitely leaving something on the table for the investors having shown interest for the credit and done the credit work for this our first euro covered bond deal.

“On a personal note, I do not understand why investors should be ‘punished’ by issuers tightening pricing to the max in an inaugural trade just because it runs very well, with a solid high quality book building rapidly.”

Syndicate officials at and away from the leads said fair value for the new issue was difficult to calculate as BRFkredit has no outstandings, but cited the most recent deal from fellow Danish issuer Danske, a Eu1bn March 2021 issue, as trading at 14bp, mid.

“That differential feels about right for a new issuer,” said a syndicate official away from the leads.

The deal is the first euro-denominated covered bond issue from the Jyske Bank Group, which has previously only issued senior unsecured bonds in euros. BRFkredit has one euro-denominated benchmark senior unsecured bond outstanding.

Novak said the issuer had decided to establish itself in the euro market via the mortgage arm BRFkredit in order to obtain greater diversity of long term funding and extend its maturity profile, adding that the need for this has increased because of growth in Jyske Bank’s home loan products – at Dkr60bn as at March 2016.

“We needed to reduce our dependency on the Danish market,” she said. “The traditional Danish mortgage bonds in Danish krone, some with embedded call options, have due to both the currency and the technical features never been easy to market to investors outside of Denmark.

“The only way to get greater diversification into long term covered bond funding is to issue something that is market standard.”

The debut is backed by cover pool E, which comprises both BRFkredit’s traditional mortgage loans and the bank home loans originated by Jyske Bank, which are 100% residential.

“From a technical perspective, having the Jyske Bank home loans in the BRFkredit mortgage pool E gives us a unique enhanced flexibility in the mortgage bonds BRFkredit can issue – while keeping flexibility on the asset side – related to the bank loan products we can offer clients from Jyske Bank,” said Novak.

“In other words, we are able to keep offering the so-called one year ARM loans to our good and solid clients – as we have now ‘broken the ice’ on funding them with longer dated euro bonds – ensuring compliance with the S&P SFR, while at the same time reducing our dependence on the Danish krone market and the quarterly refinancing volumes.”

The set-up complies with the Danish balance principle as the joint funding loans are sub-portfolios of the total covered pool, said Novak. The market risk in such sub portfolios relative to funding is perfectly hedged via swaps, she said.

Novak added that the deal offers the first opportunity to invest in a euro covered bond backed wholly by Danish mortgages, with issuance from Danske being backed by mixed cover pools.

BRFkredit said it expects to launch its second euro benchmark covered bond in the fourth quarter of 2016, and that it anticipates it will issue two deals per year in 2017 and 2018.

Novak added that the next issue will likely have a maturity of at least five years, as the issuer wishes to build out its curve.

“We are here for the long run,” she said. “From an overall group perspective we have now taken the first step on the path to becoming a frequent euro market issuer, expanding our investor universe even further, with at least one senior unsecured benchmark a year from Jyske Bank in addition to the planned BRFkredit euro covered issuance – and at some stage also subordinated issues from Jyske Bank.”