LF Hypotek brings back Swedes as euros offer savings

LF Hypotek priced the first Swedish euro benchmark covered bond of the year on Tuesday, a Eu500m no-grow seven year that was one of three deals in the market on the same day in what was a busy week for euro covered bonds.

Syndicate officials described the market on Tuesday as “crowded”, with Bank of Ireland Mortgage Bank and Spain’s CaixaBank also pricing euro benchmarks that day.

Despite the competition, LF Hypotek leads BNP Paribas, Nordea, RBS and UniCredit built an order book of more than Eu1.3bn for the Eu500m no-grow seven year deal. They priced it at 16bp over mid-swaps, the tight end of guidance of the 18bp over area that followed initial price thoughts of 18bp-20bp over.

Martin Rydin, head of treasury and executive vice president at Länsförsäkringar Hypotek, said the issuer was very pleased with the outcome.

“Swapped back into Swedish kronor, the all-in level is much better than the level we could achieve in the domestic market, in the ballpark of roughly 6bp-7bp better than the domestic market,” he said.

LF Hypotek’s deal is the first Swedish euro benchmark covered bond since the end of October, when SEB sold a Eu1bn seven year at 10bp over.

It coincides with a pick-up in activity in the Swedish domestic covered bond market, according to SEB analysts, who noted that new five year bonds for Nordea Hypotek and SEB got March off to a strong start.

LF Hypotek’s deal shows that euro funding is attractive compared with funding in Swedish kronor for domestic issuers, adding that they therefore expect other Swedish issuers “to follow LF Hypotek’s example and direct covered bond supply to the euro market in the near term”.

Finland’s OP Mortgage Bank issued its first deal in nearly two years on Monday, a Eu1bn seven year priced at 14bp over (see separate article), and Rydin said that the reception enjoyed by that deal had been a factor in LF Hypotek’s decision to issue.

LF Hypotek’s deal was somewhat “opportunistic”, he said, but added that the bank had always intended to issue one benchmark in 2014, and that it had been targeting the first half of the year.

“After the outcome of the OP Mortgage Bank deal, we recognised that the market was strong and investor demand for core covered bonds was there,” he said.

“In addition, the cross-currency swap into Swedish kronor is also very attractive at the moment, which left us feeling now was the time to take advantage and pull the trigger.”

The seven year maturity made economic sense for the issuer given that the curve from five to seven years is not very steep, added Rydin.

“We had two options, five years or seven years, and seven offered better relative value in comparison with the domestic market and there is also currently solid investor demand in that part of the curve,” he said.

The deal was the fifth euro covered bond in the seven year maturity in the past month.

LF Hypotek for now does not intend to tap the euro benchmark covered bond market again this year, according to Rydin, and will instead potentially consider its options in the euro senior unsecured market at a later stage.

“We are intending to be a regular covered bond issuer but what you can expect from us is one euro benchmark a year,” he said. “This takes us out of the euro market for this year.

“At some point in time we [LF Bank] will establish ourselves in the euro benchmark senior unsecured market, but we’ve yet to decide when this will be.”

Germany took 44.5% of LF Hypotek’s issue, the Nordics 22.4%, the UK and Ireland 8.7%, the Benelux 8.3%, Austria 6.4%, Switzerland 4.4%, France 4%, and others 1.3%. Banks were allocated 47.9%, funds 29.8%, central banks and public institutions 10.1%, insurance companies 10%, and private banks 2.2%.

A Eu1bn seven year issue for Australia’s Westpac Banking Corporation today (Thursday) took euro benchmark covered bond supply to Eu4.25bn this week across five deals.