SBAB tight to Nordea in Skr1.5bn debut AT1 with biggest buffer

SBAB sold its first Additional Tier 1 issuance on Monday, Skr1.5bn (Eu163m) of perpetual non-call five notes split into fixed and floating rate tranches that were priced just 15bp wider than where Nordea last week issued krona AT1.

The mandate for the 100% government-owned institution’s inaugural AT1 was announced on 20 February and, with leads Citi and Swedbank, SBAB then last week held a roadshow, meeting with some 30 accounts in Stockholm through a group meeting and sevewral one-on-ones.

“It’s been a while since we last issued this type of instrument,” said Fredrik Jönsson, head of treasury at SBAB. “We have some old hybrids in place, but they are being grandfathered and under that treatment become less efficient every year.

“And with the new regulatory landscape that we and every other bank is facing there is room for issuing these AT1 instruments, so it is efficient from a regulatory perspective to have these on our balance sheet.”

He also noted that the bank has Skr2bn of old hybrids coming up for call in June.

With its inaugural deal, the bank becomes the fifth Swedish institution to publicly place AT1 instruments after the big four Swedish banks, although until last week’s Nordea trade – which also incorporated US dollar and Norwegian krone tranches – such issuance from the country had been restricted to the dollar market.

“The major Swedish banks have been out there and issued in dollars, but we, a smaller bank, issued in Swedish kronor for a few reasons,” said Jönsson. “First of all, our size ambitions: you can, of course, do a sub-benchmark in dollars, but for a proper benchmark you need $500m-plus.

The Skr1.5bn total size of SBAB’s deal is equivalent to $177m.

“Another thing,” added Jönsson, “is that our lending is in Swedish kronor, so it is more natural for us to issue in our domestic currency compared with the big banks – they of course also have lending in Swedish kronor, but they also have lending in euros and in dollars.

“And finally Swedish kronor is our major funding currency and it is important for us to give our domestic investor base an opportunity to buy our AT1 in their preferred currency.”

After its roadshow the issuer proceeded towards launch and by last Friday (6 March) had attracted some Skr2bn of indications of interest, according to a banker at one of the leads, with tight pricing achieved by Nordea the day before confirming a high level of confidence in the krona market. The leads then built an order book of Skr4bn on Monday and on the back of this were able to tighten pricing from initial price thoughts of the 350bp over Stibor area to a re-offer spread of 325bp over.

“If we had wanted more we could have taken out more given this order book,” said Jönsson. “We went out with IPTs at 350bp, and thanks to the good order book and quality of the order book we were able to get down to 325bp.”

The transaction was split into Skr1.1bn of floating rate notes and Skr400m of fixed, reflecting the respective levels of demand, he said.

Jönsson noted that the spread was only 15bp outside the 310bp level achieved by Nordea in Swedish kronor.

“All in all we are very pleased with the result,” he said. “15bp is not that much in this kind of transaction and that’s the ultimate proof that investors are very comfortable with an SBAB AT1 offering.”

Under the Swedish FSA’s latest Pillar 2 requirements announced on 17 February, SBAB has a required CET1 ratio of 21%, higher than those of the big four Swedish banks, and also the highest CET1 ratio, at 29.8%. The high requirement is driven by a 25% mortgage risk weight floor in Sweden that accounts for 11.7 points of SBAB’s Pillar 2 requirement.

Jönsson noted that this means SBAB’s AT1 has the largest buffer to estimated MDA restrictions of any AT1, 21.8 points, while it has a buffer to the 7% group-level CET1 trigger of 22.8 points (the AT1 also has a 5.125% bank-level trigger).

“We have been looked at as a very safe option even though we have an expected rated from S&P of BB+ compared with the investment grade ratings of other Swedish banks’ AT1s,” he said. “There has not been that much AT1 supply Swedish krona and we had more than 40 different accounts in our order book.”

Asset managers were allocated 66% of the issue, pension funds 16%, corporates 1%, hedge funds 1%, foundations 1%, and others 15%. Swedish investors took 85%, Norway 11%, Denmark 2%, Finland 1%, and the Benelux 1%.

The loss absorption mechanism on SBAB’s AT1 is temporary write-down, which was deemed the only viable option given the bank’s 100% government ownership.

Jönsson said that the AT1 issue meets SBAB’s projected AT1 needs, taking into account call dates of all its legacy hybrid Tier 1 this year and next.

“Of course the regulatory landscape can change, but as we see things now, we have more or less issued the size that we have a need for over the coming years, at least,” he said. “And we were quite open about that in the presentation: if you want SBAB AT1, now is a very good chance to get that exposure.”