Pohjola in senior sterling first as UK vote surprises to upside

Pohjola Bank achieved investor diversification through a debut syndicated sterling deal on Tuesday, a £700m (Eu976m) dual-tranche issue that benefited from positive sentiment that followed a decisive UK election result while volatility hit the euro market.

The Finnish issuer’s senior unsecured deal, comprising a three year FRN and a seven year fixed rate tranche, was the first bank bond to be launched in sterling after the UK general election on Thursday of last week (7 May), which the Conservative Party won with a majority despite a hung parliament having been forecast.

“Obviously the election result was good for us,” said Lauri Iloniemi, head of group funding at OP-Pohjola.

“It calmed down some of the feelings on sterling.”

The deal is Pohjola’s first syndicated sterling deal and launch followed meetings with investors in London and Edinburgh last week.

Leads HSBC and Nomura launched the £400m seven year fixed rate tranche with initial price thoughts of the mid-swaps plus 95bp area, then moved to guidance of the 93bp-95bp area, before setting the re-offer at 93bp for a larger size than initially planned.

The £300m three year FRN tranche was printed at three month Libor plus 45bp, the middle of IPTs and guidance. The final order book for the overall transaction exceeded £900m, with demand skewed towards the fixed rate tranche.

“Whilst a dual-tranche transaction is rare in the sterling market, the initial feedback was positive and split between money market accounts for an FRN and from UK institutional funds and central banks for a longer fixed rate transaction,” said a syndicate official at one of the leads.

Iloniemi said the funding achieved with the three year tranche was very competitive versus what the issuer could have achieved in euros, while that of the seven year tranche was roughly in line with what could have been achieved through a euro deal.

But more important, according to Iloniemi, was that the sterling first reached a variety of accounts.

“This deal was more for diversification than arbitrage,” he said.

Of the seven year tranche, UK investors took 60%, Asia 23%, the Nordics 12%, Switzerland 3% and Germany 2%. Fund managers were allocated 49%, central banks and official institutions 35%, insurance companies and pension funds 15% and private banks 1%.

“In sterling deals you usually have only the typical sterling investors, but these are quite unique figures,” said Iloniemi, noting the high non-UK distribution of the longer tranche.

Of the three year tranche, UK accounts took 92%, Ireland 5%, Germany 2% and others 1%. Fund managers were allocated 88%, banks 10% and insurance companies 2%.

“The success of this transaction is testament to the strength of the Pohjola credit and their ongoing investor work,” said the lead syndicate official.

Iloniemi said that the group has no plans to issue sterling-denominated covered bonds.

Pohjola’s sterling deal came in a week in which euro FIG issuance was thin on the ground, with broader market volatility, following a back-up in Bund yields, curbing activity.

“I think the sterling market was the one that behaved nicest if you consider what has happened in the last few days,” Iloniemi said.

While there was no benchmark euro FIG issuance this week, Robert Chambers, FIG syndicate manager at Crédit Agricole CIB, said some issuers have been waiting by the sidelines for the market to improve.

“Issuers are just not in a rush to come to market with a rates backdrop that is not conducive to issuance,” he said. “In these conditions, even if you launch a deal with a big new issue premium, if rates move against you during execution then you’ll struggle.”

However euro FIG supply could pick up if conditions remain stable next week, Chambers said, noting that with 10 year Bund yields tightening slightly today (Friday) the market appeared to be in better shape.

“The pipeline is there,” he said. “If we see a couple of trades done successfully, more should follow.”