Mortgage Society debut ‘explodes’, OP €1.25bn ‘awesome’

May 6th, 2016

The Mortgage Society of Finland sold a debut, €250m five year covered bond on Monday, with demand of €850m surpassing expectations after the book built rapidly, according to the issuer’s head of funding. Fellow Finnish issuer OP sold a “blowout” €1.25bn seven year issue on Tuesday.

Mortgage Society of Finland imageThe new issue from The Mortgage Society of Finland (Suomen Hypoteekkiyhdistys, or Hypo) came after the issuer finalised its mortgage backed programme on 1 April, after having received a preliminary covered bond rating of AAA from Standard & Poor’s.

The issuer, with leads Danske, Nordea, LBBW and Swedbank, held a five day roadshow ahead of the potential debut, visiting Helsinki, Stockholm, Copenhagen, Oslo and Germany and concluded on 22 April.

The deal was then launched on Monday after investors had indicated that they had completed their credit work, according to a syndicate official at one of the leads. He said that launching the deal on Monday had the added benefit of giving them a clear market, with no other issuers active in covered bonds on what was a UK public holiday.

The leads launched the €250m five year deal at 9:30 CET with initial price thoughts of the 27bp over mid-swaps area, and the deal was subscribed within half an hour. Guidance was then set at the 25bp area on the back of indications of interest above €400m, before the spread was fixed at 22bp, with the books above €750m. The book closed at over €850m with 41 accounts.

“It is a bigger success than we dared hope,” said Petteri Bollmann, director of funding and treasury at The Mortgage Society of Finland. “Right from the start the book was already at €400m, and that was without the central bank being involved.

“This issue just exploded.”

Bollmann added that originally the issuer had planned to close the books when they reached the level of being around twice oversubscribed.

“However, it went so fast that there really was not time,” Bollmann said. “We are only sorry that we could not allocate more of the deal to some of our investors, while at the same time being extremely happy with the issue.”

Bollmann said that The Mortgage Society achieved one of its primary objectives by reaching a large proportion of new investors with the deal, noting that the deal attracted bids from central Europe and Asia, as well as significant Nordic accounts that had not previously invested in the issuer.

Accounts in Finland were allocated 51% of the deal, other Nordics 16%, Germany and Austria 20%, the Benelux 6%, southern Europe 5%, and Asia 2%. Central banks and official institutions bought 35%, banks 29%, pension funds and insurance companies 29%, and asset managers 7%.

Syndicate officials at the leads estimated that the deal offered a premium of around 10bp versus outstanding Finnish paper, seeing Aktia €500m March 2022s at 4bp-5bp, mid, and Ålandsbanken €250m 2021s at 8bp. They also cited €1bn 2021 bonds from more established names such as OP Mortgage Bank and Sampo Bank as being quoted at minus 1bp, mid, and plus 2bp, respectively.

Bollmann said that the price was in line with the issuer’s expectations of where a debut issue should be priced.

“We want to see that investors are satisfied with the issue as well,” he added. “I expect that the deal will tighten on the aftermarket, and that is also good for those in the deal.”

Bollmann added that he hopes Hypo’s spreads will eventually tighten to at least the same levels at which Ålandsbanken’s covered bonds trade.

The Mortgage Society has previously sold regular senior unsecured issues, of around €100m. Bollmann said that going forward the issuer plans to scale down its senior unsecured issuance while selling at least one €250m covered bond per year.

The Mortgage Society’s programme is the first Finnish covered bond programme to be governed by Finnish law, whereas the programmes of other Finnish issuers are governed by English law. Bollmann said that this did not seem to have an impact on the outcome of the deal.

“There may have been some investors who decided to stay out of the deal because they were unfamiliar with it, but we did not get any direct negative feedback on this issue,” he said.

Bollmann added that the programme documentation is available in English, with the English version of the programme being the binding one, and noted that Finnish covered bond legislation is copied from the German Pfandbrief law.

OP Mortgage Bank sold its €1.25bn seven year issue on Tuesday. Leads Barclays, JP Morgan, OP and Société Générale priced the deal at 4bp over mid-swaps, after having launched the deal with guidance of the 8bp area and revised guidance to the 6bp area. The book closed at €3bn, pre-reconciliation.

“It’s a complete blowout,” said a syndicate official away from the leads. “It’s awesome – it’s the right deal at the right time in the right maturity – and based on that book, they could have printed even more.

“It’s a very strong market and OP capitalised on that.”

The deal is the tightest euro benchmark covered bond of the year outside Germany.

Some syndicate officials away from the leads said the deal had been priced through the bid side of the issuer’s curve, seeing OP November 2020s at flat, bid, and September 2022s at 3bp and estimating that fair value for the new issue was 5bp-6bp.

Others, however, saw OP seven year paper at around 4bp, bid, and estimated that fair value for the new issue was 2bp, based on the mid side of OP’s curve.

“Whichever way you look at it, it’s an impressive price that people were clearly willing to buy into,” added a banker.

A syndicate official away from the deal agreed.

“OP started tighter than I thought they could and then were able to tighten the spread by 4bp,” he said. “It was really some achievement.”

Central banks and official institutions bought 36% of the deal, banks 34%, asset managers 24%, insurance companies and pension funds 4%, and others 2%. Germany and Austria 48%, the Nordics 30%, France 9%, the Benelux 4%, Asia 3%, southern Europe 2%, the UK 2%, and Switzerland 2%.

OP’s new issue is the first benchmark Finnish covered bond of the year, with the last such issuance from the country having been in November, when OP and Danske Bank Finland sold five year issues.

The deal was launched on the same day as a Eu750m long five year Pfandbrief for LBBW, which attracted books of over Eu2.2bn, while also being priced with a slim new issue premium, of 1bp-3bp, according to bankers.

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