DNB beats January rush with Eu1bn 10 year covered bond

DNB raised Eu1bn of prefunding via an opportunistic 10 year euro benchmark covered bond yesterday (Wednesday) that it launched to capitalise on tight spreads and a positive market, according to an official at the issuer, who said that the bank’s deals will be smaller than in the past given declining wholesale funding needs.

The Eu1bn 10 year deal is DNB Boligkreditt’s first euro benchmark covered bond since June, when it sold a Eu1.5bn seven year, but its fourth such deal this year after it was quite active in the first half of the year. Few issuers have sold three euro benchmark covered bonds this year, and DNB is the only one to have priced four deals.

Many syndicate bankers have been calling for issuers to take advantage of a lack of supply and supportive technicals rather than wait until next year to tap the markets.

“DNB snatched the perfect window and took advantage of the liquidity situation, rather stable markets, and the scarcity of covered bonds in the primary market,” said Vincent Hoarau, head of financial institutions, covered bond and ABS syndicate at Crédit Agricole CIB. “It was a wise decision to anticipate the January rush and to go for a 10 year while spreads in covered bonds are at their lowest for a very long time.

“It clearly paid off, judging by the deal’s reception but more importantly the absence of a new issue premium.”

Thor Tellefsen, senior vice president and head of long term funding at DNB Boligkreditt, told The Covered Bond Report that the new issue constitutes prefunding, replacing a deal that would otherwise have probably been launched in January.

“We hadn’t been in the market since June,” he said, “and spreads have tightened significantly since then, so we thought: why not hedge ourselves a bit in terms of spread?

“I’m not certain if spreads will be tighter or wider in January, but there are usually a lot of deals and now we were able to go to market without any competing supply.”

A syndicate banker away from the deal said the deal was well timed, although the level was a touch tight in his view.

“Why wait until January when the market is good and technicals are supportive?” he said. “I can’t knock it.”

The transaction had an “opportunistic touch”, said Tellefsen, with the issuer only deciding early this week to come to market as it did not need the funding.

This also influenced the size of the deal, which was DNB’s first euro benchmark not to exceed Eu1bn, something that Tellefsen said could happen more regularly.

“We were not aiming for a large deal size, and you won’t see us in the same deal sizes as in the past,” he said.

This is because DNB is growing at a slower rate than previously, and has increased its deposit base, he said, pointing out that DNB Bank’s deposit coverage has increased from 58% at the end of 2011 to 65% this year.

The issuer had a preference for the 10 year maturity, added Tellefsen, with the smaller deal sizes typical of the long maturity compared with shorter dated issues not a deterrent for the issuer given that it did not need to raise a large amount of funding.

The new issue was only the second Eu1bn-plus 10 year benchmark since early July, with France’s Compagnie de Financement Foncier on Friday having sold the first such deal since then, a Eu1bn maximum issue priced at 74bp over. Austria’s RLB NOe-Wien sold a Eu500m 10 year at the beginning of September.

Leads Deutsche Bank, Natixis, Nomura and UniCredit priced DNB’s deal at 33bp over mid-swaps on the back of Eu1.6bn of orders, after having gone out with initial price thoughts and then guidance of the low to mid-30s over.

A banker away from the leads said the pricing was in line, not a giveaway but tight enough.

A lead syndicate banker said the new issue premium amounted to around 2bp-4bp, with March 2022 DNB Boligkreditt bonds trading at 30bp over bid before the new issue was announced. Tighter pricing would have been possible, he added, but the issuer decided to fix the re-offer spread at 33bp over to ensure secondary market performance.

Another syndicate official on the deal said that it took advantage of investors’ hunger for supply and a tightening of agency spreads in recent weeks that made relative value in Nordic covered bonds and DNB look attractive compared with a rich agency segment.

While a DNB March 2022 covered bond had only tightened by up to around 5bp since the beginning of October, he added, agency spreads and French and UK covered bond spreads have tightened some 15bp-20bp in the past four to six weeks.

For example, a Eu3bn 10 year European Investment Bank benchmark, a Euro Area Reference Note (EARN), came at 49bp over mid-swaps in September and has tightened to around 20bp over, he noted.

At 33bp over the deal came some 10bp through French government bonds, which discouraged French accounts, who only took 6% of the bonds, according to Tellefsen.

“On a 10 year you would hope for more French participation than that, but there was a strong German bid,” he said. “So except for the, in some way expected, low French participation, we are very pleased with the outcome, especially when you consider that we priced a 10 year in March at 61bp over and are now doing one at 33bp over.”

More than 80 accounts were in the order book. Germany and Austria took 66%, Nordics 6%, France 6%, the UK 6%, Italy 4%, the Netherlands 4%, Asia 4%, rest of Europe 3%, and others 1%. Asset managers were allocated 45%, banks 39%, insurance companies and pension funds 10%, and SSAs 6%.