Flows down, NIPs up ahead of Nordic reporting

Financial institutions bond issuance was noticeably down on the busy start to the year this week, with the latest deals showing that core issuers should be mindful of the need for larger new issue premiums (NIPs) and/or consider subordinated debt opportunities, according to bankers.

Only two euro benchmark covered bonds were priced this week, a Eu500m no-grow five year deal for Belgium’s Belfius Bank and a Eu1.5bn six year obligations de financement de l’habitat issue for France’s BPCE SFH. Kommunalkredit Austria announced a roadshow starting at the end of January, which it intends to follow-up with a public sector issue.

Supply was also muted in the senior unsecured market, where there were only three euro deals — a FRN for Crédit Agricole and fixed rate issues for Berlin Hyp and Banca Popolare di Milano. In the broader debt capital markets, a heavily oversubscribed Eu10bn 10 year deal for Spain stole the show.

“The market was quieter this week, with peripheral issuers taking a break after having rushed to the market in the first two weeks of the year, and there has been a bit more volatility in spreads,” said Viet Le, financial institutions and covered bonds syndicate manager at Crédit Agricole CIB. “The backdrop is still good, but there have been a few slow deals in core/semi-core because accounts are finding spreads there too tight, either on an absolute basis or from a relative value perspective.”

This is something that Nordic issuers will need to bear in mind when they emerge from blackouts following release of their latest results, he adds.

Swedbank kicks off the Nordic bank reporting season with release of its year-end results on Tuesday (28 January), with Nordea reporting the day after, and others following in early February.

Alex Sönnerberg, Nordic DCM origination at Crédit Agricole CIB, said that fading demand for core covered bonds does not reflect waning interest in the asset class, but is “purely a matter of price/premium for core issuers” given tight secondary levels.

Indeed, BPCE was generally seen as having shown that core issuers need to provide a slightly larger new issue premium than what has tended to be on offer in this year’s deals. The issuer built the largest order book for a core covered bond so far this year, containing some Eu2.4bn of orders, and priced its issue at 24bp over mid-swaps. The deal was first marketed with initial price thoughts of the mid to high 20s over.

A lead syndicate official said that at 24bp over, the new issue premium was 5bp, and that the strategy had been to offer investors value, taking into account a slightly softer market and selectivity among some accounts.

Syndicate officials away from the leads generally saw the issuer as having offered an attractive spread.

Sönnerberg said similar dynamics can be observed in the senior unsecured market, with many investors still constructive on the market but cautiously so given that spreads are close to fair value and technicals are the main driver for prevailing tight levels.

“It’s no surprise that the majority of supply in senior financials this year has come from peripheral banks, which satisfy yield-driven investors,” he said. “Therefore it makes more sense for core issuers with subordinated funding needs to tap the euro market right now given they can offer investors an attractive coupon from a high quality credit with low probability of default whilst still achieving a tight spread.”

Svenska Handelsbanken’s Tier 2 deal from the beginning of the year is a case in point, according to Sönnerberg. The Swedish issuer priced a Eu1.5bn (Skr16bn) 10 year non-call five at 143bp over mid-swaps on 7 January, the tightest Tier 2 since the collapse of Lehman Brothers, with investors swarming around the rare “low beta in sub” offering.