DNB hits US in $1.25bn covered bond, gets tight level in Skr4bn Tier 2

DNB Boligkreditt attracted strong US interest with a $1.25bn (Eu1.12bn, Nkr9.44bn) five year benchmark covered bond on Wednesday, and yesterday (Thursday) achieved tight pricing with a Skr4bn (Nkr3.61bn, Eu430m) subordinated issue that a banker said he believes to be the largest ever Tier 2 in the krona market.

The Norwegian bank has been issuing covered bonds in the dollar market with 144A documentation since 2010 alongside several of its Nordic peers as well as Australian and Canadian issuers.

However, two weeks ago Swedbank sold a $1bn five year deal without 144A, dispensing with the documentation after having used it for previous dollar benchmarks, and three German banks have sold Reg S dollar issues this year. An official at another Nordic bank that has previously used the documentation to target US accounts meanwhile said this week that the 144A format does not today offer much added value in terms of investor distribution or pricing advantage.

However, Thor Tellefsen, head of long term funding at DNB, said that more than half of the investors that participated in yesterday’s 144A benchmark would not have participated in a euro benchmark covered bond from the Norwegian issuer, and that these investors were also among the biggest takers.

“Even if you don’t sell that much into the US you can still have a good investor base in Europe today,” he said, “and of course we could have done Reg S. But we decided to see what we could get out of the US and actually we sold surprisingly well into the US.

“We had close to 50% North America, which was better than anticipated. For us 144A was beneficial.”

He suggested that the extended investor reach of the format probably enabled DNB to achieve a $1.25bn issue size rather than the $1bn size achieved by Swedbank on 6 May.

Leads BAML, Barclays, HSBC and RBC priced the deal at 37bp over mid-swaps after having gone out with IPTs of the high 30s. The 37bp spread was the same as that achieved by ANZ on a $1.25bn five year covered bond on Tuesday and the spread paid by Swedbank on its five year earlier this month.

“The pricing was pretty much given,” said Tellefsen. “It was, let’s say, the established price and I felt it was a fair price.

“Comparing the US market versus euros is not necessarily just about the last basis point,” he added. “This is to a large extent about investor diversification.”

DNB’s last euro benchmark covered bond was a Eu1.25bn five year in September 2014 and Tellefsen said that the issuer could return with a euro benchmark this autumn.

The Norwegian bank turned to subordinated issuance yesterday, selling a Skr4bn dual tranche 10 year non-call five issue that a banker involved in the deal said he believes to be the biggest Tier 2 issue ever launched in the Swedish market. The deal was announced at the beginning of last week and a roadshow held in Stockholm this Tuesday and Wednesday.

“Right from the start interest was pretty good, with IOIs already coming in after the meetings,” said a syndicate at one of the leads – DNB and Swedbank, “so we were pretty confident when we opened books this (Thursday) morning.”

The leads went out with IPTs of the 140bp over mid-swaps/Stibor area and maintained this through guidance to final pricing of 140bp. The lead syndicate official said that a clear view was taken early on that this was the tightest level that would be achievable, but noted that it represented funding equivalent to 110bp over mid-swaps in euros.

“That is extremely tight,” he added.

DNB’s Tellefsen said that the pricing was very favourable and that the issuer was very happy with the diversification achieved through the Swedish krona issue, which attracted Skr6bn of demand to its Skr3bn FRN and Skr1bn fixed rate tranches. According to the lead syndicate official, demand was heavily skewed towards the FRN tranche, which he attributed to the interest rate outlook in Sweden.

“We have never seen a sub deal attract this amount of demand in krona before,” he added. “We have had a severe lack of supply as it has been a long time since we saw a quality name in sub debt format.”

He said that he believes it to be the biggest ever Tier 2 in the Swedish market with local banks having typically issued Skr500m-Skr1bn deals and only up to Skr2bn. He noted that outstandings with three to four years remaining until their calls were trading at around 100bp over.

Swedish accounts were allocated 80% of the paper, Norway 17%, Denmark 1%, Finland 1%, and a very small amount went to Luxembourg, according to the lead syndicate official.