DNB returns in resilient start for covered, but SR struggles

A DNB €1.5bn five year covered bond attracted over €2bn of demand yesterday (Thursday) as eight euro benchmarks totalling €8.5bn hit the market this week, with the asset class proving resilient amid tough conditions, although a SR-Boligkreditt deal was seen as a struggle.

On the back of negative headlines from China, markets endured a difficult start to 2016, with European equities volatile through the week. However, after being reopened on Tuesday, covered bond supply continued through the week, disturbed only by public holidays across Europe on Wednesday, and bankers said risk-off sentiment had supported the low beta asset class – in contrast, only one senior unsecured benchmark hit the euro market.

DNB Boligkreditt launched its new issue on a busy day for covered bonds yesterday, with three other euro benchmarks also in the market. Leads Crédit Agricole, Deutsche, LBBW and UBS launched the €1.5bn (NOK14.5bn) five year issue with IPTs of the 20bp over mid-swaps area, before moving to guidance of the 18bp area on the back of books of around €1.5bn. The deal was then re-offered at 17bp with the books closing at over €2bn.

“We think this is a very good result,” said Thor Tellefsen, head of long term funding at DNB. “There aren’t many covered bonds in the five year maturity that print with a size of €1.5bn and collect an order book of over €2bn, so we feel very happy about this deal.

“Given the turbulence and the uncertainty in the market, we think the price is good,” he added. “We deliberately left room for performance in the pricing, and in the end this was a good deal both for DNB as an issuer and for the investors.”

The deal was quoted 2bp tighter this (Friday) morning, according to a syndicate official at the leads.

Tellefsen added that the deal offered “a fair price” for DNB compared to what it could have achieved in its domestic market. The lead syndicate official said the deal offered a new issue premium of 5bp, seeing DNB 2020 paper quoted at 10bp-11bp, bid.

“No other five year deal has come with a smaller new issue premium this week,” he said. “I’d say this is right up there among the best deals of the week.”

A syndicate official away from the leads said the deal was one of the better results of the day.

“You knew when it was announced this was going to be a good one, as it is what investors like – a medium term deal that isn’t ECB eligible,” he added.

Tellefsen said DNB chose to launch its deal early in January, in spite of the volatile market backdrop, since it has €2bn of covered bonds maturing next week, and because it wanted to come ahead of a potential large pipeline next week.

DNB sold only one euro benchmark covered bond in each of the last two years, hitting the market with €1.25bn five year issues in September 2014 and October 2015, but Tellefsen said the issuer would likely return to the market again in 2016.

“We have higher funding needs this year than in the two previous years,” he said. “Somewhat more activity should be expected from DNB this year.”

Banks were allocated 55% of the deal, central banks and official institutions 21%, asset managers 17%, insurance companies 5%, and corporates 2%. Accounts from Germany and Austria took 64%, the Benelux 10%, Asia 6%, the UK 6%, the Nordics 5%, Central and Eastern Europe 3%, Switzerland 3%, France 2%, and southern Europe 1%.

Fellow Norwegian issuer SR-Boligkreditt followed today, after having announced a mandate for its €500m no-grow seven year deal yesterday afternoon.

Leads Danske, Deutsche, JP Morgan and UniCredit launched the €500m no-grow seven year mortgage-backed issue with guidance of the 25bp over mid-swaps area, before re-offering the deal at 25bp two hours later. The size of the order book was not disclosed.

“This was a very much run of the mill trade,” said a syndicate official at one of the leads. “From our side we are glad to get the deal done.

“If I put my investor glasses on, this is an undisputable AAA quality issue coming with the highest spread of the week, so what’s not to like?”

Syndicate officials away from the leads said the deal appeared to have struggled.

“It looks OK but not overwhelming,” said one. “It has gone a little slow and with no tightening of the spread and no announcement on the book you have to assume demand has been disappointing.

The lack of demand was attributed to a lack of familiarity with the issuer.

The deal is SR-Boligkreditt’s second benchmark non-domestic covered bond. The Norwegian issuer made its debut on 21 September with a €500m five year issue. SpareBank 1 SR-Bank had previously financed its residential mortgage lending through pooled issuance via SpareBank 1 Boligkreditt, but largely for regulatory reasons established its own issuer, SR-Boligkreditt.

“It looks like they got stuck,” said syndicate official. “But this is only their second deal, so they are not so well known, whereas most of this week’s supply has been from real household names.”

The lead syndicate official agreed.

“This is a relatively new name that is not so well known to all in the covered bond market, and many investors have not yet set up lines with the issuer,” he said.

The lead syndicate official suggested the deal’s seven year maturity was another factor.

“While seven years represents a natural extension of the curve for SR-Boligkreditt following its five year issue, the investor base for seven year deals is rather smaller than five years at the moment,” he said.

Syndicate officials had noted that among four deals yesterday, a seven year issue for La Banque Postale and a 10 year for ABN Amro generated less demand than a three year for Bank of Montreal and DNB Boligkreditt’s five year.

“In particular, we saw many bank treasuries limiting their bids to maturities of five years or under,” the lead syndicate official added.

“Another thing is that, while the price tag is certainly attractive for investors, we have in the first week of the year seen a lot of supply, so you can understand why an investor might overlook a trade like this, which is more on the margins,” he said.

A syndicate official away from the leads agreed.

“It has been a very busy week, so it is not surprising that there might be some fatigue,” he said.

The syndicate official said another factor that could explain limited demand is that the deal was competing with the first euro senior supply of the week, with BNP Paribas today in the market with a €1.25bn seven year issue priced at 65bp over mid-swaps.

“People have been waiting for the return of that segment, so with a good name and a good spread BNP could have drawn some attention away from this deal,” he said.

The lead syndicate official said, however, that the leads had received no feedback to suggest this is the case.

“This deal is a different kettle of fish and we had no feedback to suggest there was an overlap in the investor bases,” he said. “However, you could see how certain accounts, if they are putting their money towards anything today, would go for the senior deal from a national champion in BNP Paribas.”

Syndicate officials at and away from the leads said fair value for the deal was around 18bp, seeing SR-Boligkreditt’s 2020s at 14bp, mid, and seven year paper from DNB Boligkreditt and Sparebanken Vest in the context of 16bp-17bp.

Syndicate officials said they anticipate further heavy euro covered bond supply next week, suggesting that the difficulties encountered by SR-Boligkreditt are specific to the issuer and that any takeaways are limited.

“This week’s supply has shown that non-Eurozone names, apart from the less familiar SR-Boligkreditt, are working particularly well, and that covered bonds remain a good format in challenging times,” said one.