Interview: Martin Rydin, Länsförsäkringar Hypotek

The Covered Bond Report’s Neil Day spoke with Martin Rydin, vice executive president, LF Hypotek, and head of treasury, LF Bank.

Why has LF not yet issued a euro benchmark covered bond this year?

Ever since we issued our inaugural euro benchmark covered bond a few years ago we have committed to the market that we will be a regular issuer and we have communicated that we intend to return to the market approximately every 12-18 months. The last time we issued was in June last year.

This strategy definitely holds firm, but looking at 2012, what has happened is that we already are more or less done with our full year funding plan and have a very strong liquidity position. Year to date we have had a very, very positive development on the deposit side. By the end of the second quarter our deposits had increased by 28% year on year. We have also been able to do good volumes of both senior unsecured and covered bonds domestically.

This, of course, puts us in a very comfortable funding position and has meant that we haven’t really had the need so far this year to issue a euro benchmark covered bond. But our intention is still to be a regular issuer and we definitely intend to maintain our presence in the euro market.

What has driven the domestic market?

We have seen very strong investor demand  in the domestic market and it has been very effective from a pricing perspective. Supply has decreased as Swedish banks in general have prolonged the maturity profile of their funding, and structurally lowered their yearly funding needs.

If you look at the big Swedish banks there has also been a definite trend — probably due to good funding access — whereby they have issued more senior unsecured debt than before. That has also led to a reduced need for covered bond funding. So there has been a positive supply/demand dynamic driving the domestic market.

As for LF, covered bonds are our main funding source since retail lending accounts for around two-thirds of our total lending. Looking at our long term funding year to date, we have done roughly two-thirds covered bonds and one-third senior. This split represents an increase in senior unsecured issuance compared with last year.

What other markets have you tapped besides Swedish kronor?

We have been active in the Swiss franc market this year with a seven year covered bond during the second quarter. Further on, we also issued our debut Norwegian krone covered bond, a long five year launched in the beginning of the summer. So we have, in spite of no euro issuance, done bits and pieces internationally.

It’s of course very important to have diversified funding, but given the size of our balance sheet there is a limit on how many markets we realistically can look at. Our main objective is to maintain and further develop a liquid curve in the domestic market and continue our efforts to build a curve in euros.

But besides that, the Swiss franc market and the Norwegian krone market are markets in which we want to be active. The issue sizes in those markets suit our balance sheet quite well, and they offer good diversification for us. We typically try to time our activities in these markets to when we can achieve roughly the same all-in cost as in the domestic market.

But apart from these markets, it is currently hard to see any further diversification into other markets. Instead, we are constantly doing investor work in order to broaden our investor base within the euro market.

How do you view Eu500m deals?

LF Hypotek is a small but growing issuer. Arguably a Eu500m trade fits our balance sheet and maturity profile better than a Eu1bn trade. However, we took a strategic decision from the beginning to position ourselves in line with the bigger issuers, based on Eu1bn sized trades, knowing that we are a growing borrower. The objective has been to ensure that outstanding trades are as liquid as possible in order to create a good platform for future issuance.

We have, however, noticed a change in attitudes towards Eu500m trades where we have seen many German former Jumbo issuers now tapping the market for Eu500m. So in the end for us it comes down to how we want to position ourselves, and it will be trade-off between continuing the current strategy and the ability to be active on a more regular basis which is also of great importance, so I’m definitely not ruling out that we at some point will look at a Eu500m trade.

Moody’s recently improved Swedish TPIs  — were you aware that could happen?

No, I was not aware that Moody’s were reviewing the TPIs. The Swedish issuers have for a long time tried to explain to the rating agencies the particularities of the Swedish market and its strengths, so we are not surprised that they have eventually started to see these.

It’s not always very clear how agencies give credit to the strengths of a market in their methodologies.

One area S&P could perhaps give more credit to in their ALMM calculation would be the practice in the Swedish market of buying back outstanding benchmark bonds ahead of maturity. The Swedish market allows for this effective way of managing the refinancing risk way ahead of the actual maturity, and this is not something we get any sort of credit for in the S&P modelling.

Have you signed up to the ECBC label yet?

No, we haven’t signed up yet and we haven’t made a formal decision, but it’s quite likely that we will participate. To be honest, I support the labelling initiative, but I would have preferred a bit of a narrower definition. I think it would then have had greater value. It’s quite difficult to quantify the value of it the way it is now constructed.