Crédit Agricole CIB Nordic Panel, Frankfurt

Representatives of three leading Nordic issuers joined Crédit Agricole CIB and guests for a covered bond discussion in Frankfurt at the beginning of December.

The participants were:

• Klas Axelman, Senior Funding Manager, Länsförsäkringar Hypotek
• Matej Chytil, Covered Bond Trader, Crédit Agricole CIB
• Florian Eichert, Senior Covered Bond Analyst, Crédit Agricole CIB
• Anders Lund Hansen, Group Treasurer, BRFkredit
• Timo Ruotsalainen, Managing Director, Aktia Real Estate Mortgage Bank

Eichert: Klas, for much of this year, Nordic covered bonds have been in high demand. Yet the only ones really servicing that demand have been Norwegian as well as Finnish issuers. What has happened to LF? No need for euro funding, cost aspects, or did you think there was no demand from euro investors?

Axelman: For a number of reasons — but primarily because the inflow of customer deposits grew in line with our lending business this year. In addition, the euro market was considerably more expensive compared to the domestic market at the beginning of the year due to the cross-currency basis swap. The differential between the two markets has since diminished during the third- and fourth-quarter to a level where we feel the opportunity cost of diversification is justifiable.

Eichert: Matej, how has that lack of issuance in Sweden and Denmark on the one hand and issuance in Norway and Finland on the other affected spreads in recent months? Has there been any trading at all or are we looking at the same squeezed environment as in much of core Europe?

Chytil: For most of the year the Nordic covered bond market has been a one-way street as investors couldn’t afford to sell bonds since they wouldn’t be able to source an alternative given the lack of new issue supply and high demand. However, after the ECB effectively promised to save the periphery, liquidity in the secondary market improved somewhat along with investor sentiment. Flows became increasingly two-way in Nordic bonds as some investors wanted to increase their exposure to peripheral covered bonds and sell safe haven Nordic assets. As the result, the street have been increasingly long Nordic covered bonds during the last quarter.

But as dealers tried to square up their balance sheets for year-end, we haven’t discovered any difficulties selling paper as investors were quick to lift any cheap offers. In addition, the structural squeeze in Nordic covered bonds helped put a lid on spreads, which meant any spread widening was limited to a couple of basis points. For example, the recent 10 year covered bond issue from DNB did not put any pressure on the long end of the curve despite not being a blow-out deal.

Eichert: We’ve talked about the low issuance from some Nordic countries in 2012. Now, Timo, looking at your situation, can we expect even negative issuance, or in other words is there a chance that you’ll tender the mortgage bank covered bonds to bring down the programme size faster than through natural amortisation?

Ruotsalainen: The idea of offering investors a switch came up when we were waiting for Moody’s to announce their rating action for Aktia REMB as there was a threat of the outstanding bonds being downgraded to single-A. However, as Moody’s only downgraded Aktia REMB by two notches to Aa3 there is less motivation behind the idea than previously. Of course, we would appreciate input from the market in terms of whether there is a demand for switches or not, but so far we have not received any such request.

Eichert: Matej, how did you experience the situation around Aktia as a trader? Were investors nervous and has it led to some issuer differentiation in spreads, or did everyone just stay calm and wait for things to clear up? After all, downgrades even to single-A have lost a lot of their excitement these days.

Chytil: The spread between senior unsecured and covered bonds is about 10bp lower in the Nordics compared to other core-European jurisdictions and this tells you that asset encumbrance is not a concern for the market at the moment and that sound fundamentals starting with sovereign finances and ending with cover pools are the overriding factor for senior-covered spreads.

Eichert: Anders, you are not issuing European-style euro covered bonds but focus on Danish krone markets. You do, however, issue senior secured bonds into the European investor base. In doing that you are not the first Danish issuer; Nykredit has issued two “junior covered bonds” already at levels very close to senior unsecured spreads. How much covered is there in this product both fundamentally as well as from a regulatory stand point?

Hansen: Senior secured is closer to senior unsecured than to covered bonds. However, investors do have a secondary claim on the cover pool ahead of unsecured creditors and from a regulatory standpoint senior secured debt should be excluded from bail-ins. Even though we don’t have the final certainty on this, comments from the Danish Ministry of Finance hint in that direction. Investors should, however, analyse our senior secured debt from a similar angle to when they analyse traditional covered bonds as they do have a claim on the cover pool even if it ranks after the covered bond investors.

Eichert: Klas, Anders’ decision is driven by regulatory developments. Thinking about regulatory developments and Sweden, how are the comments made by Riksbank about increasing transparency on asset encumbrance levels affecting you as an issuer? Are those guys as aggressive about it as the Norwegian FSA, who are thinking aloud about issuance limits and increased capital requirements?

Axelman: Regarding encumbrance, the Swedish FSA has not been as aggressive as the Norwegian but welcomes more transparency from the banks. The Riksbank recommends in its stability report that banks, for example, disclose encumbered assets, assets available for encumbrance, and an analysis of how encumbrance can be affected by changes in the value of derivatives. However, I don’t think this will impact banks’ funding behaviour much.

Eichert: Matej, I know you don’t trade financials but you guys are trading alongside the financials traders. Has the increased awareness about encumbrance led to a bigger covered-senior spread in Nordics relative to other markets?

Chytil: The spread between senior unsecured and covered bonds is lower in the Nordics compared to many other jurisdictions, so asset encumbrance in the Nordic senior space is nothing that investors pay too much attention to or would view in a negative light.

Eichert: Is this asset encumbrance topic being discussed in Finland at all? Could this maybe have been an additional element in your decision to issue via the universal bank?

Ruotsalainen: The local FSA recommends that the LTV on any mortgage loan is lower than 90% and the latest Finnish Ministry of Finance working group recommendation was even as low as 80%, but it’s not in the legislation. As such, banks are effectively asked to self-regulate in that respect, and the question surrounding LTVs remains one of the unknowns in terms of future regulation.

And no, discussions about asset encumbrance did not affect us in our decision to start using Aktia plc as the issuer of covered bonds going forward.

Eichert: It’s not just the central banks and regulators these days that are thinking aloud; the rating agencies are doing the same. And when it comes to the Swedish banking sector, they seem to be a bit at a loss. S&P is using very strong and negative language when it comes to the Swedish market, both in absolute terms as well as relative to Finland and Norway. Moody’s, on the other hand, just changed the banking sector outlook from negative to stable. Who is right here Klas?

Axelman: The two main rating agencies, Moody’s and S&P, are both saying that Sweden can’t emerge unscathed from what’s happening in the rest of the world. However, the evaluation of the impact it will have on Swedish banks varies between the two agencies.

It’s interesting to note the difference between the agencies when it comes to the time horizon of their analyses — S&P said it will lower ratings if it sees a sustained economic decline over the coming 18 to 24 months, while Moody’s recently revised the outlook for Sweden’s banking system to stable from negative reflecting expectations that over the next 12 to 18 months asset quality will be strong, capital levels provide a good buffer, and low provisioning support profitability. Maybe it is a bit early to speculate what will happen in two years’ time.

Eichert: Matej, Nordic covered bonds have tightened a lot this year. How do headlines like S&P or house price developments look to you from the trading perspective? Are investors still scrambling to find paper or are they approaching Nordic sectors a bit more cautiously and in a more differentiated way?

Chytil: The rating agency comments have not impacted spreads in the euro market at all. Rather, it’s technical factors that are the driving factor and, as mentioned, differentiation between issuers has compressed.

Eichert: Talking about collateral markets for your covered bonds, the signals are a bit mixed depending on where you look. Agencies still say that Nordic pool quality is among the very best in an international context. At the same time, valuations seem stretched and in Norway, for example, mortgage market growth is already losing a lot of the steam of recent years. What’s the story in Finland on this?

Ruotsalainen: Property prices in Helsinki have continued to rise, albeit at a moderate pace, while prices in the rest of the country are flat. As in many capitals around the world, it’s difficult to find land to build new flats and houses in the Helsinki region, which puts upward pressure on prices.

Eichert: Klas, how are your international and domestic investors taking these negative agency-related and housing market headlines? Do they focus on the fact that there are bigger problems elsewhere in Europe, or do they get a bit nervous considering how tight Swedish covered bonds are?

Axelman: The international investor base has not reacted at all; in fact Swedish bank spreads have tightened in spite of the headlines. Many of the Swedish investors that buy Swedish krona-denominated covered bonds are rates-based, and from their perspective we haven’t seen any evidence of nervousness when it comes to the credit quality and the underlying collateral — probably because they know the domestic market very well.

Eichert: The same question to you Anders: how is your Danish investor base behaving right now? Are they less active now than at the beginning of the year?

Hansen: Danish investors are normally very active at this time of the year, due to the refinancing of ARM loans; right now they are only less active from the perspective that domestic investors have been increasingly crowded out by the international investor community looking to invest in safe haven assets such as Danish covered bonds, primarily driven by favourable moves in cross-currency basis swap prices.

Eichert: Gentlemen, we’ve talked about low issuance a few times, we’ve talked about regulation impacting banks, and we’ve talked about agencies and collateral markets. Let’s wrap this panel up with your funding plans for the next year.

Hansen: Having just signed BRFkredit’s new EMTN programme, we are planning to bring a senior secured benchmark bond to the euro primary market in the first quarter of 2013. In the domestic market, BRFkredit will participate in the refinancing auctions in February, August and November.

Axelman: Having stayed away from the euro market since June 2011, LF will likely return with a new Eu500m benchmark covered bond sometime during the first half of 2013.

Ruotsalainen: Aktia Bank Plc should get its licence to issue covered bonds by the end of the first quarter of 2013. A benchmark transaction will likely follow at some point during the year and depending on investor feedback a liability management exercise is also possible. The bank also has demand for senior unsecured funding, albeit in limited size, which may see us active in the private placement market as well. n