LF Hypotek hits tight end after waiting for clear market

Länsförsäkringar Hypotek sold a Eu500m (Skr4.64bn) seven year covered bond at the tight end of its pricing expectations yesterday (Thursday), according to an official at the issuer, who said that it timed its deal to avoid competing supply from the Nordics and elsewhere.

Many Nordic banks went into blackout last week and therefore were not candidates for issuance this week. However, LF Hypotek does not have a formal quiet period and was hence free to come to market, said Martin Rydin, head of treasury at the issuer, although he noted that it tries to avoid issuing too close to its results and, with results due on 29 April, would probably not have done so next week.

“We have been communicating that we are doing one euro benchmark covered bond this year, most likely during the first half,” he said. “We have been monitoring the market and there are a few things that are important for us: first of all, we want there to be good market conditions, without too much competing supply, and also the basis swap into Swedish kronor.

“And we felt at the beginning of this week that it would probably be a good week: a lot of banks are going into blackout, so we did not expect any other Nordic supply and the market was in good shape. We thought there would be good demand for a trade.”

However, LF Hypotek avoided Tuesday when the UK’s Abbey entered the market with a Eu1bn seven year covered bond at 1bp over mid-swaps.

“We didn’t want to go out in parallel with the UK bank because we expected them to offer a little bit more spread, so we avoided that day,” said Rydin. “And Wednesday there was the ECB meeting, which was not a good day.”

“We therefore decided to announce right after the ECB, with execution today (Thursday). We did not expect that the supply from the French and the Dutch issuers, whose spreads are compressed by the ECB, would hurt our project. And our transaction went really, really well, so we are extremely pleased.”

The French and Dutch supply came in the shape of a Eu1bn eight year for Caffil at 11bp through mid-swaps and a Eu500m seven year for NIBC at 1bp over.

LF Hypotek leads Commerzbank, Danske, JP Morgan and Natixis launched its Eu500m no-grow seven year deal with initial price thoughts of the flat to mid-swaps area. After taking indications of interest of more than Eu1bn, guidance was initially set at the minus 2bp area and then revised to minus 3bp +/-1bp. The re-offer was then set at minus 4bp on the back of Eu1.3bn of demand.

“This one looks a really nice trade,” said a syndicate official away from the leads.

Outstanding LF Hypotek May 2020 paper was seen at 7bp through mid-swaps, mid, pre-announcement, by a banker at one of the leads, and March 2021s at 6.75bp through, with bankers suggesting the new issue premium was limited. The last Swedish euro benchmark covered bond was a Eu1bn seven year for Swedbank on 4 March, which was priced at 5bp through mid-swaps.

“Looking at where our outstanding bonds are trading,” said Rydin, “it’s almost no new issue premium at all, approximately 1bp. The re-offer of minus 4bp was the outcome that we felt we could reach if everything went very well, and that is where we ended up, so it was a good result.

“And it’s a result that likely leaves room for some performance as well, so I think it’s good for all parties.”

He said that the outcome compares fairly well with the domestic market, where the issuer’s longest outstanding benchmark is a six-and-a-half year, with the minus 4bp print in euros equivalent to only a few basis points over a fair level for LF Hypotek in the seven year part of the Swedish krona curve.

LF Hypotek’s latest issue comes after its last two euro benchmarks involved selling Eu500m seven years in April 2013 and March 2014, respectively.

“Clearly the seven year segment suits us quite well since we mainly issue a little bit shorter in the domestic market,” said Rydin. “But seven years also seemed to be the sweet-spot at the moment in terms of investor demand.

“It fits well into our maturity profile, too. We now have one bond outstanding in euros with five years remaining, one with six years remaining and now a seven year, and that obviously makes sense from a maturity profile perspective.”