LF follows Swedbank to euros, response ‘a vote of confidence’

LF Hypotek returned to the public euro covered bond market for the first time in nearly two years on Monday, selling a three times subscribed Eu500m seven year deal that was priced close to recent transactions by its larger peers, including Swedbank Mortgage last week.

The transaction was announced on Friday afternoon and launched on Monday to give investors time to familiarise themselves with the deal, according to Martin Rydin, head of treasury at Länsförsäkringar Bank and executive vice president at LF Hypotek. He said that the outcome of the deal exceeded expectations in terms of the investor response and pricing.

“We had an extraordinary investor demand,” he told The Covered Bond Report. “The deal was 3.4 times oversubscribed, and the bookbuilding was really quick.”

Leads Danske Bank, LBBW, RBS and UBS priced the deal at 15bp over mid-swaps, after having gone out with initial price thoughts of the 20bp over mid-swaps area and opened books with guidance at the 17bp over area.

“It was a very strong print in a red hot market,” said Vincent Hoarau, head of FIs, covered bond and ABS syndicate at Crédit Agricole CIB. “It is a Nordic and rare issuer, and the result was no surprise.

“The issuer has been waiting for nearly two years and its patience paid off. Mid-swaps plus 15bp is a fantastic outcome looking at where Nordic national champions recently priced seven year benchmarks.”

At 15bp over mid-swaps, the deal was priced only 2bp wider than where a Eu1bn seven year Swedbank Mortgage deal was priced on Thursday of last week (25 April), and 1bp wider than where a Stadshypotek Eu1bn five year issue was priced on 12 March, noted Rydin.

“This was a very good outcome for LF and a clear vote of confidence in our credit from investors,” he said. “The deal positioned us very well in comparison to our Swedish peers.”

LF is a relatively small but growing issuer with limited funding needs, said Rydin, meaning that all funding theoretically could be raised in the Swedish market so the decision to tap the euro market was mainly driven by diversification reasons.

“We are too small to justify setting up documentation for a dollar programme, so we achieve diversification by issuing in euros, Swiss francs and Norwegian kronor,” he said.

The Swedish krona market is usually more efficient in terms of funding costs, he added, but tapping the euro market allowed LF to extend the duration of its funding to seven years — which is an unusual tenor for the Swedish market — at a cost of only a few basis points more than in the domestic market.

According to Rydin, LF wanted to place a transaction in the euro market this year, ideally in the first half.

“Our access to the Swedish market allows us to be very picky on when to launch a euro deal, so we can wait for the right opportunity,” he said.

“On Monday the market had the perfect dynamics for launching a transaction,” he added, mentioning as supportive factors a strong investor demand for Swedish covered bonds, which was highlighted by the Swedbank trade last week, a lot of liquidity in the market, and a decline in government bond yields that made the pick-up offered by covered bonds look more attractive for investors.

German and Austrian accounts took 49% of the deal, Nordics 28%, Benelux 10%, Switzerland 7%, UK 4%, and others 2%. Bank were allocated 37%, asset managers 36%, insurance companies 13%, supranational agencies and central banks 10%, and others 4%.

Swedbank Hypotek’s Eu1bn seven year issue launched on Thursday of last week also marked the return to the public euro covered bond market for the Swedish issuer after more than one and half year’s absence.

The deal was re-offered at mid-swaps plus 13bp, which, according to a syndicate official at one of the leads, makes it the tightest Nordic covered bond since April 2008, as well as Swedbank’s tightest jumbo. And he said that the deal had already performed, tightening to 11.5bp bid on the day of launch. It was quoted at 10bp mid today.

Leads Danske Bank, LBBW, RBS, Société Générale and Swedbank went out with initial price thoughts of the high teens, before offering guidance of the 15bp over mid-swaps area and fixing the spread at 13bp. Bankers at and away from the leads said that although IPTs were quite generous, the strategy was sensible. The eventual new issue premium was put at 1bp-2bp.

‘‘We knew there was a good deal on the table with the right timing and correct execution, but the outcome of the deal exceeded our expectations in terms of investor response,” said Ulf Jakobsson, head of funding and liquidity at Swedbank. “We had a very strong order book, well over Eu3bn, and around 160 accounts involved.’’

Factors contributing to the strong outcome of the deal included good market conditions and limited supply from the Nordic region, according to Jakobsson, with another being the release of the issuer’s quarterly result two days before launch (on 23 April).

“After the release of our results we saw a very positive development in the secondary market of our outstanding senior bonds,” he said. “The high number of accounts involved in the transaction is also an acknowledgement of all our efforts in the investor relations field.”

Fund managers took 37%, banks 35%, central banks and SSAs 23%, insurance companies 4%, and others 1%. Germany and Austria were allocated 40%, the UK 15%, the Nordics 14%, Asia 12%, the Benelux 8%, France 4%, Switzerland 3%, and the rest of Europe 4%.

The new issue came after Swedbank tapped the dollar covered bond market on March 26 with a $1bn five year issue. Jakobsson said that the new issue will most likely be the only euro covered bond from Swedbank during 2013.

“This transaction, together with our US dollar transaction, covers most of our needs outside the domestic Swedish krona market,” he said.

The new euro issue came with a premium of approximately 3bp versus the domestic Swedish krona market. “The euro market is important for us and it’s a premium we are willing to pay” added Jakobsson.