Duration bid opens 10s to SpaBol, misreport unheeded

SpareBank 1 Boligkreditt sold its first 10 year euro benchmark on Tuesday, with the possibility of offering a positive yield at the long end a factor, according to the issuer’s COO, who said erroneous reports on its substitute assets did not affect the Eu1bn deal’s successful outcome.

The deal extends SpareBank 1’s curve by three years, and bankers noted that such long-dated deals are rare for Norwegian issuers. The last 10 year euro benchmark from the country was a Eu1bn January 2023 issue for Terra BoligKredit (now Eika Boligkreditt) in 2013.

“We’re moving out the curve for two reasons,” said Eivind Hegelstad, COO and head of investor relations at SpareBank 1 Boligkreditt. “The first is that fits very well into our maturity profile, as the previous longest bond we had outstanding was a 2023 issue.

He said the other reason SpareBank 1 chose the longer maturity is that it was the recommendation of its syndicate banks.

“And the reason for that is that investors are looking for positive yields,” said Hegelstad. “It’s just a fact of life that the euro swap curve is now negative out to seven years, and we wanted to offer investors more yield.

“It was wide open and it is lovely to start putting some activity in that part of our curve,” he added. “We of course want to space out our maturities over time – that is an important goal for any issuer.”

SpareBank 1 leads BNP Paribas, Citi, HSBC and UniCredit launched the 10 year issue with guidance of the 8bp over mid-swaps area, before the size was fixed at Eu1bn (Nkr9.31bn) and guidance revised to the 5bp area, plus or minus 1bp will price within range, on the back of over Eu1.75bn of orders. The deal was then re-offered at 4bp, with the book closing at around Eu1.9bn.

The deal was priced at 99.361 with a coupon of 0.25% to yield 0.315%.

“We are very happy with the final outcome,” said Hegelstad. “The price is the tightest we could have done from the starting point of the 8bp area, and of course the demand supported that tightening.

“Demand kept growing when we tightened the price, and only very few investors dropped out when the price was set. That shows that the orders definitely supported that plus 4bp level.”

Syndicate officials said the deal was trading 1bp-2bp inside the re-offer this (Wednesday) morning.

Bankers said the deal offered a new issue premium of around 4bp, which they said was a good result given that new Pfandbriefe from WL Bank and Commerzbank were deemed to have offered similar premiums this week.

“We feel that was a pretty fair premium, and probably in line with the other deals this week from Germany,” said Hegelstad.

Asset managers were allocated 33% of the bonds, banks 25%, central banks and SSAs 18%, insurance companies and pension funds 18%, corporates 2%, and others 4%. Accounts in Germany and Austria took 56%, the Benelux 15%, the Nordics 7%, Asia and the Middle East 7%, France 4%, the UK and Ireland 3%, Switzerland 2%, and others 6%.

“The order book was also of extremely high quality,” said Hegelstad. “We were glad to see many names and jurisdictions in there, and the allocation process was a challenging one.”

Hegelstad said that some investors approached SpareBank 1 with queries regarding the level of substitute assets in its cover pool after a Bloomberg article on 14 August noted that the issuer had increased the amounts of government debt, covered bonds and derivatives in the pool and suggested the issuer was short of mortgage collateral.

In a statement posted on its website SpareBank 1 denied any shortage of mortgages and said the development was not unusual. The issuer said the article was based on a misunderstanding of SpareBank 1’s business and of the market, and said the increase in substitute assets is explained by a liquidity management rule the issuer has in place.

This rule states that, as a minimum, SpareBank 1 Boligkreditt will hold liquid assets corresponding to 100% of debt maturities coming due over the next six months, and 50% of those coming due over the six to 12 month period.

According to an investor report, as of 30 June SpareBank 1’s cover pool included Nkr25.7bn (Eu2.77bn) of substitute assets, including covered bonds of other Nordic issuers, Norwegian government bonds and SSA debt. This has risen from Nkr24.8bn as of the end of the first quarter, and compares with Nkr4.87bn as of the end of the second quarter of 2015.

Investor reports show that the share of substitute assets in SpareBank 1’s cover pool fluctuates over time, and Hegelstad noted that SpareBank 1 has a relatively high volume of debt maturing over the next 12 months – including a Eu1.25bn issue in March 2017 and a $1.25bn (Eu1.11bn, Nkr10.3bn) issue in June 2017 – meaning the share of substitute assets is now higher.

“There is no shortage of mortgages, and we don’t have any problems sourcing mortgages from our parent banks,” he said. “The reason we have this high level of liquidity is that we run the business with a view towards being liquid, and we have this liquidity rule in place.”

Hegelstad said that the report on the higher level of substitute assets in the cover pool ultimately had no impact on investor demand for the deal.

“The order book reflects that, and there were no questions about that when we went to the market,” he said. “There were only some questions, from a handful of investors, on the day the Bloomberg article went out.

The deal is SpareBank 1’s second euro benchmark covered bond of the year, following a Eu1bn seven year issue in March, and Hegelstad said he does not expect the issuer to return to the market this year.

“But it is difficult to say, and the markets determine when it makes sense to issue,” he said. “We are a regular issuer, and you should probably expect two euro benchmarks from us per year, as a general approach.”