Interview: Kristian Fiskerstrand, Terra BoligKreditt

Jan 17th, 2013

Kristian Fiskerstrand, vice president, funding at Terra BoligKreditt, spoke with Nordic Financial Institutions & Covered about the issuer’s funding plans for 2013, a new name for the Terra alliance, and regulatory moves in Norway.

What are your funding needs for 2013?

We expect net growth in the mortgage book of about Nkr9bn. That, combined with redemptions, makes up a total funding need of Nkr16bn, so roughly Eu2bn-Eu2.5bn for this year as communicated to investors when we were on the roadshow ahead of our deal in October.

Will there be any changes in the way you approach the market?

There will be fewer deal-specific roadshows. There are several reasons for that, but mostly that people have started to get to know us now, so we can use our time better by being more direct in visiting specific investors and doing it more as a continuous process throughout the year. So we should be in a position to turn around more quickly in the market.

I imagine that would help in today’s markets…

It is an advantage, but we probably wouldn’t turn around as quickly as someone like DNB. We would probably have updated investor material and a conference call or something. But yes, the market is changing so you get a smaller execution window and it will be good to know that we will have done the investor work and be in a position to turn around more quickly.

You launched your first jumbo in October. What can we expect size-wise going forward?

With the size of the portfolio now it makes sense for us to have at least one jumbo a year and maybe two. That said, it is also possible that we do other benchmark transactions in between to make the ALM profile better. So I wouldn’t necessarily expect that all the future euro transactions will be jumbos, but we will be issuing at least one jumbo transaction a year. And then it depends on how the domestic market is developing, and how much we allocate for that versus euros.

What is your strategy towards domestic issuance versus euros?

We have a strategy — and have done since the market started in 2007 — to be in the international market and the purpose of this is to have a diversified investor base. So in terms of strategy between 75% and 80% is expected to be in the international market, which for us predominantly means euros, at least at the moment.

In the Norwegian market we have a different approach than in euros. Rather than larger new issuances we do continuous taps and quote prices to the brokers on a continuous basis.

Did the jumbo format affect the pricing, distribution or anything else?

We did see a higher degree of funds participating, but whether that was because of the timing or simply because of the jumbo size is something that we cannot be certain of, but we did see investors who previously had been asking for larger sizes participating in the transaction.

And if you look at our curve, after its launch the jumbo was trading inside our previous transaction even though that has a maturity six months shorter.

Why were there changes to the ownership structure of Terra BoligKreditt last year?

This was related to strengthening the support mechanisms. We also implemented a note purchase agreement and a shareholder agreement with our owners. One of the things that implies is an annual rebalancing of the ownership so that the ownership of the company afterwards is equal to the share of mortgages in the cover pool. That is difficult to do within a holding structure. So it is a strengthening of the structure and making it more transparent. Now it’s quite a bit easier to see who the owners are and what their status is.

Separately, while on the topic of the structure, the banking alliance is developing and as we announced in late December the board of directors has proposed that the alliance change its name from “Terra” to “Eika” some time in 2013. There will be no other legal or organizational changes following this process, and the registration ID in the Norwegian Business ID will remain the same, although there will probably be a change to ticker codes for TERBOL in the future. We will update the market throughout the process, and we also have a mailing list at our investor relations website that those interested can sign up to and get the updates on that and other matters relevant to Terra BoligKreditt directly by e-mail.

Should the change in structure support the rating of your covered bonds?

Whether it should or not is always a subjective interpretation… We obviously think so. But at the same time, a few Norwegian savings banks were put on negative watch and downgraded. So what we can say is that one of the motives was to reduce any downside risk to the rating and we strongly believe that the result is a quite stable rating.

Moody’s made changes to its collateral score last summer, introducing a country floor, which was worse than your previous individual score. What did you make of that?

Kristian Fiskerstrand

For us, transparency is the most important thing. When it happened we felt it would be good to explain the change in methodology in a way that investors didn’t get any negative surprises, especially since we had been the best, or among the best, on the collateral score tables. So we sent a memorandum about this to investors. At the time we sent out the release we didn’t actually know if Moody’s would publish the individual scores in their quarterly report, so we wanted to make sure investors had this information – although they are actually still including this.

We had some good feedback from investors on the way in which we sent this out quite early, explaining that this was about a change in methodology and not any change to the underlying quality of the assets or anything to do with the structure of the company.

When you look at the reason behind the change in methodology the floor is supposed to take into account a stressed scenario where we have systemic risk in the property market. When you look at our cover pool we have a maximum LTV at origination of 60% and in our last investor presentation we looked at how much eligible assets would be reduced in such a scenario, given the 75% LTV cap on eligibility for mortgages in Norway. Given a decline in house prices of 35%, we would then have to put in Eu260m in new collateral. And when you compare that, as discussed before, with the transfer rate of the owner banks in the Terra group, they have only moved about 23% of eligible residential mortgages to the covered bond company, so we can actually get around that by substituting the mortgages that are exceeding 75% or we can get additional senior funding to pay into the cover pool.

The Norwegian authorities have said they plan to restrain covered bond issuance. What do you expect to happen?

Most likely you will see any changes effected through banks’ capital ratios. We have seen that already, to some extent, by the proposed changes to the IRB floor on risk weights for mortgages. I think that if you have a high transfer rate you will have to set aside additional capital for this in individual capital assessments. The regulator was talking about a qualitative consideration of the transfer rate and how that affects the risks in the whole industry.

We are the only covered bond issuer in Norway that has a maximum LTV of 60%, and the reasoning for this is exactly the 75% eligible asset limit. If you issue bonds against mortgages up to that level and you do get a drop in house prices you will have to post additional capital, so we reduce the risk by having that cap, as well as through other measures. We hope that investors appreciate the high quality of the cover pool.

The regulator perhaps caused some unnecessary noise by not being totally clear about what is being planned when it made the announcement, but at the same time there has obviously been a strong focus on house prices in Norway, and I think you have to consider those two developments together. This is particularly so because you probably would see a higher interest rate level in Norway were it not for the strong krone and its effects on the export industry, which is limiting the central bank somewhat, and so if you want to have a reduction in house prices, making mortgage lending and mortgages more expensive is one of the ways in which you can reduce credit growth. It also has to be considered alongside consumer protection changes that we saw in December 2011, when a maximum 85% LTV was introduced as well as a minimum 5 percentage point increase in interest rates for stress testing liquidity upon origination. So you have to look at it as part of the bigger picture where they want to reduce the focus on the housing market and increase the stability of the banks.

Are there fundamental reasons for the rise in house prices or is it a bit of a bubble?

There are fundamental reasons for it, in particular wage growth in Norway. If you look at wage-deflated prices the picture is quite different than if you look into nominal house price developments. In addition, of course with the low interest rate scenario affordability of housing has not been higher for quite a while, if ever. So housing is affordable. Also you have a situation in Norway where 80% own their own house and they need a place to live. It’s not driven by speculative growth and you have quite low new construction. So I do think that you have fundamental factors supporting the housing market.

Of course you have had that in some other countries ahead of housing bubbles. But looking into some other crises and doing some back-testing, including the Norwegian housing bubble in the late 80s/early 90s, we don’t see the same wage growth compared to credit growth. At least at the moment we do believe that it is sustainable.

Have you signed up for the ECBC Label? And have you responded to the ICMA CBIC transparency initiative?

We haven’t signed up yet, but we do expect to do so. We believe in the initiative because we want to support the product and believe that it is good to have some type of qualifications necessary for something to be a covered bond.

Regarding the CBIC initiative, we are publishing on our website and on a quarterly basis our information in an Excel spreadsheet according to a national template agreed by a working group of the Norwegian Covered Bond Council. We publish the information quarterly to coincide with rating agency needs because we want to reuse as much data as possible rather than making additional work.

We had to do some national adjustments to the CBIC template to make it fit with the framework we have, but I do believe that we are quite open and transparent about the cover pool. And we published information in an Excel spreadsheet even before the CBIC initiative because we believe that it is to our benefit to be transparent because of the quality of the cover pool, so we actually do appreciate investors doing their own analysis of it.

We are now trying to get a convergence between the issuers so that it is easier to make comparisons between issuers, as well as adding more information.

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