Interview: Lauri Iloniemi, head of group funding, OP-Pohjola

The Covered Bond Report’s Neil Day spoke with Lauri Iloniemi, head of group funding at OP-Pohjola, about the Finnish issuer’s funding strategy.

Are you satisfied with your how your funding has gone this year?

We are very happy. Our funding needs are relatively modest and so far this year we have done three benchmark sized transactions — one covered bond, one senior and one tier two transaction — and all of them went well.

I am especially happy with the latest covered bond, which was launched in May. It was kind of a reopening of the market at that time as there had been a gap of two or three weeks since the last covered bond, and we had very, very good demand for the bond — as we did for the senior bond that we had done earlier, but this one was even better. I guess that’s partly because investors were looking for quality paper and there had been the lack of supply beforehand. The market was closed for most issuers, but for a good Nordic name it was open and it really was a screaming success.

These benchmark deals that we have done so far will most likely take care of our benchmark sized needs for this year. You never know how things will evolve, but that’s the base case.

When did you do the tier two?

That was in February. It was our first deal of the year. Our policy was: when times are difficult, you had better start with the most difficult thing and then move towards the easier ones. And of course tier two was the most difficult bond, then came the senior, and then covered.

We are in the happy position to be able to do all of these transactions during these times, which is not the case for everyone.

Spreads have since tightened — do you perhaps wish you had waited and gotten a better level now?

The level we achieved on the covered bond was mid-swaps plus 32bp, and at that time it was really tight, an extremely good level. One cannot shop for levels all the time. You cannot do your deals at the end of the year even if levels seem to go in one direction. You do the best deal at a given time at the given levels that you can achieve.

You know, I get quotes from investment banks on levels where I could issue, and usually when times are stable, these quotes are in a very compact range, within 5bp or so. But it’s like a thermometer of the market: when they are more widely dispersed — and that has happened during this crisis many times, and this year as well — that might be a bad time to issue because that is a sign of a lot of uncertainty and a lot of unknowns.

How are people viewing Finnish credits?

When I have met with investors, and I have met quite a few, they have been very positive about Finland. We are part of the euro-zone, but we are a very special part of the euro-zone. Finland and Luxembourg, for example, are the only two countries that would today meet the Maastricht criteria. So our economy has been managed differently than those of many other parts of the euro-zone. Investors recognise that. Basically they treat us as part of the Nordic family of countries.

We are a regular issuer, coming every year, but without issuing too much and there is not that much Finnish supply overall. There is always that scarcity with us. We also benefit from robust legislation and being a co-operative, which makes us less likely to suffer from headline risk.

How have Finnish house prices developed?

House prices have been very steady during this crisis. Just after Lehman Brothers we had a drop in house prices of roughly 8%. Of course, we have gained that back since and house prices are increasing, but they are increasing in line with disposable incomes. So there is no bubble building, nor are house prices in Finland depressed at this point. They are increasing in a very steady fashion. The year-on-year increase in Finland as a whole to June was a little below 2%, very modest.

What are your views of the ECBC label and ICMA CBIC transparency initiatives?

Regarding labelling, we are for transparency, and that seems to be the industry standard. I have always said: in our case, the deeper you look, the better we look. So it is not a problem at all for us. We have not signed up to the label yet, but we are definitely looking into it.

If you look at the Covered Bond Investor Council proposal, there seems to be a lot of overlap with the labelling initiative. I understand that investors need to know more, but the template is quite detailed in some places. So I am not crazy about it, but if it becomes the standard then so be it — we have nothing to hide. But I would rather that the label is the industry standard.

Are you eyeing any new markets?

We have issued outside euros — in Swiss francs, Swedish kronor, sterling, for example — but not in covered bonds. In covered bonds so far we have only issued in euros.

What we have done, which we have not done previously, was to last week start doing some private placements in covered bonds, and that’s something we will continue to do in future as well. These were Eu75m and Eu25m five year plain vanilla private placements under our existing covered bond programmes. We have not issued registered covered bonds yet, but that is something we are looking into as well and I wouldn’t be surprised if we were to issue something there this year as well.

On the senior side we are active in private placements and there we are looking at a new market, which will most likely be in Asia. We are playing with the idea of issuing Samurai at some point.