Nordic curves to reprice?

The euro primary market has over the last two weeks been subdued, with only five public benchmarks being priced in covered bonds as well as the senior unsecured space. We note a number of reasons for this relative drought in what is usually a busy quarter for the debt capital markets.

Robin Bagger-Sjöbäck
Nordic FIG DCM Origination
Crédit Agricole CIB

First and foremost, the inconclusive Italian elections in late February unravelled the market and remain an unresolved issue. With fewer than 10 deals in the public market during the month of February — thanks to 2012 full-year earnings, among other things — Stadshypotek AB returned to the covered bond market after a year’s absence.

The transaction met lower investor demand than usual as a result of higher yielding competing supply, a general risk-on market mode, an aggressive IPT level, and possibly also because of the psychological barrier of breaking the 10bp over mid-swaps mark. It is also interesting to note that unlike this time last year the majority of new issues in the euro market, including Nordics, are quoted close to or even wide of re-offer, suggesting that the spread compression theme from last year has lost some steam.

The weekend after the transaction, international lenders early on Saturday morning approved a Eu10bn bailout package for Cyprus, including a proposal that would force depositors to contribute Eu5.8bn through a “one-off” bank levy. This particular element was not a part of any of the preceding bail-out agreements in the euro-zone and these days any unchartered territory quickly transforms into wobbling markets, as we have experienced before. However, the Cypriot parliament responded on Tuesday evening by rejecting the proposal.

Consequently, the European Central Bank toughened its stance on Thursday, announcing that emergency liquidity (ELA) to Cyprus will be withdrawn after 25 March if no EU/IMF programme is in place. The most recent proposal from Cyprus includes measures that will guarantee deposits up to Eu100,000, nationalise pension funds and impose some capital control on banks. However, it remains uncertain whether the parliament will pass the bills or if the euro-zone authorities will accept the measures.

So what is the impact, if any, on Nordic spreads of last weeks’ developments? From a secondary market perspective, covered bond spreads are holding their ground well, with marginally tighter levels on both a week-on-week and month-on-month basis. For example, the new long five year SHBASS 1% was issued at m/s+14bp and is now quoted ASW+12/7, a trend we believe will continue until the bid settles on Stadshypotek’s curve, around the 10bp mark.

We have seen similar spread developments in the senior unsecured space as well, and in many cases to an even larger extent, with selected paper being quoted 5bp-10bp lower compared with a month ago (source: Tradeweb). One of the main reasons we have not seen Nordic spreads underperform lately is the strong bid for high quality paper in times of market turmoil combined with low new issue supply from the region.

Moreover, by reviewing the senior-covered spread relationship we find that the gap between the two formats has narrowed and is now ranging around 12 month lows for Nordic issuers.

Nevertheless, the majority of transactions priced in the public primary market in March have offered investors a more generous new issue premium than seen earlier this year. As a result of the above-mentioned events and less supportive market conditions in general we see potential for a minor upward shift among core issuer’s new issue curves in the near future.

Theoretically, this “repricing process” should initially affect strong jurisdictions, and then over time also filter out into the rest of the market.

Robin Bagger-Sjöbäck

Nordic FIG DCM Origination

Crédit Agricole CIB