Danske finds strong demand for inaugural £500m covered bond

Sep 12th, 2014

Danske Bank sold its first sterling covered bond on Monday, a £500m (Dkr4.64bn, Eu624m) three year floating rate note that attracted £800m of demand despite coming at the same time as a £1.5bn Barclays Bank covered bond in the same format.

DanskeDanske has issued previously in sterling, but only in senior unsecured format, with its last such issue having been in 2011.

“We have been watching the space for some weeks,” said Peter Holm, senior vice president, group treasury, Danske Bank. “Obviously we have an interest in diversifying our investor base, not issuing only in euros and Scandinavian currencies, and here we saw a good opportunity to do a deal.”

A market participant away from the new issue noted that it was unusual to see Danske issue such a short dated covered bond, and Holm acknowledged that the three year transaction was not typical.

“Traditionally we have used senior out to five years and then our cover pool for funding in five years plus,” he said. “We have made some exceptions where we have seen good opportunities, for example in Swedish kronor, and now we saw one in sterling. So when we can make something attractive for both parties we try to do so, but we still have our general policy in place.”

Danske, Lloyds and RBS announced plans for the Danish bank’s issue on Monday morning but shortly afterwards Barclays went out with a covered bond in the same maturity and floating rate format.

Barclays went out with initial price thoughts of the low 20s, before revising this to guidance of the 20bp area and ultimately re-offering its issue at 19bp over three month Libor. Danske had announced IPTs of the mid to low 20s, then went for guidance of the 22bp area before finalising the spread at 21bp over. Nordea Eiendomskreditt priced a £500m three year FRN at 19bp over on Thursday of last week (4 September).

A syndicate official away from both Barclays’ and Danske’s new issues suggested that Barclays’ level might have prevented Danske from issuing perhaps 1bp tighter, and a syndicate official at one of Danske’s leads acknowledged that the Barclays pricing may have taken some pricing power away from Danske.

“On the day we had to stick to reality and that’s life,” said Holm. “Both banks got good deals and investors got the chance to put £2bn to work in covered bonds, which doesn’t happen every day in the sterling market.”

According to Holm, the re-offer level of three month Libor plus 21bp was equivalent in euros to 6bp through mid-swaps, which he said was “reasonably attractive”.

“So a very, very good match between the issuer’s and investors’ needs,” he said

Danske announced the transaction as a benchmark and Holm said that this is understood to be at least £250m in the sterling market, with the issuer having a possible £300m deal in mind but increasing the ultimate size to £500m in light of the £800m book — and thereby matching the amount achieved by Nordea last week.

Banks were allocated 60% of the deal, asset managers 16%, insurance companies 16%, and others 8%. The UK and Ireland took 62%, the Nordics 27%, Germany and Austria 4%, Switzerland 3%, the Benelux 3%, and others 1%.

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