SCBC adjusts expectations as mart widens, Eika to roadshow

Oct 2nd, 2015

Swedish Covered Bond Corporation (SCBC) adjusted its pricing expectations in the face of a widening market when printing a Eu750m five year covered bond on Monday, according to an official at the issuer, who said the outcome was a strong result in difficult conditions.SBABinstagram

Eika Boligkreditt has meanwhile mandated a roadshow ahead of a euro benchmark and more Nordic issuers are mulling deals, according to bankers.

SCBC’s deal arrived in a market substantially weaker than it had it ended last week, with syndicate officials on Monday morning citing the iTraxx Crossover being 15bp wider and the main index 4bp wider, for example, and core covered bond spreads widening 1bp and peripherals 2bp-3bp.

Leads BAML, Commerzbank, LBBW, Nordea and UBS skipped initial price thoughts to launch SCBC’s Eu750m (Skr7.05bn) five year issue with guidance of the mid-swaps plus 12bp area, before fixing the spread at 11bp on the back of Eu900m of orders. The books were closed at around Eu900m.

“We are very pleased with the transaction and I think we did a good job, considering the difficult market conditions,” said Fredrik Jönsson, head of treasury at SBAB, SCBC’s parent.

He said the issuer had been targeting either a Eu750m or a Eu1bn deal and that the price was in line with its expectations, after the issuer had reviewed secondary spreads on Monday morning. These included the most recent Swedish deal, a Eu1.25bn five year issue from Swedbank Hypotek that was priced at 7bp over mid-swaps on Tuesday of last week (22 September) and was on Monday morning quoted at 8bp-9bp, bid.

“We looked at various comparables, including Swedbank’s transaction, and we saw that the market was clearly wider and adjusted our expectations,” he said. “Markets move, and sometimes you have a market going tighter and sometimes you have a market going wider, so you have to adapt to that. It is also important to consider the long term relationship between yourself and your investors, which of course also will influence how you proceed when you are in deal mode.

“Obviously all issuers want to come and price as tight as possible – that is our job – but we cannot control market developments. Given where the market was on Monday, this was a very strong outcome.”

Viet Le, financial institutions and covered bonds syndicate manager at Crédit Agricole CIB, said the deal had gone reasonably well in what was a weak session.

“Considering the backdrop, this was a respectable outcome,” he said. “That 4bp move from Swedbank’s pricing last week reflects where the market has gone in the meantime; the differential could have been wider if you try and average spread widening across different jurisdictions along with an implied higher concession level.”

A syndicate official at one of SCBC’s leads added that as the first mover, Swedbank had the advantage in attracting demand, but said SCBC had been realistic in its expectations of what could be achieved in a weaker issuance window.

“Every issuer that has come to the market recently has had a good idea of what the market is like,” he said. “It is not the best – oversubscription levels aren’t what they were – but if you understand the terms of engagement there is still a window for issuance.

“Yes, side by side to Swedbank this isn’t as good a result, it is smaller and wider, but that reflects how the market has gone.”

Jönsson said SCBC decided to go ahead with the deal in spite of the softer market opening on Monday to meet its funding programme after concluding it is not a given that the market will improve within the next few months.

Prevailing basis swap levels also meant that issuing in euros was favourable for Swedish issuers, he said, while opportunities are currently limited in the domestic market.

“If you do the comparison it is in line or even a couple of basis points cheaper to do euro funding and swap that into Swedish kronor than to use the Swedish krona market,” he said. “Today there is some softness in the Swedish market as well, so it is good to have several markets that we can use.”

Almost 50 accounts were in the final order book, with banks taking 58% of the deal, central banks and official institutions 26%, fund managers 10%, corporates 5%, and others 1%. Accounts in Germany and Austria were allocated 53%, the Nordics 22%, Switzerland 8%, the Benelux 7%, the UK 4%, France 3%, and others 3%.

Jönsson added that SCBC would likely fulfil its funding needs for the rest of the year with small to medium-sized deals in the domestic market.

“We have covered around 90% of our needs for the year and we are ahead of our funding plan for the year,” he said. “We are now in a very good funding situation.”

Covered bond supply dried up after SCBC’s trade, with only one more benchmark issue launched this week. Bankinter yesterday (Thursday) gathered Eu800m of demand for a Eu750m five year cédulas hipotecarias that was priced in the middle of guidance, amid a market that bankers said remained challenging.

“That result can probably be read as the market still being shaky and investors still being cautious about putting their cash to work,” said Le.

Syndicate officials said Bankinter’s result would be unlikely to encourage issuers to come forward next week, but said further supply from core and Nordic names is still expected.

“We know there is a Nordic pipeline out there,” said Le. “There are a couple of issuers in discussions that might still be looking to come to market.”

And Eika Boligkreditt yesterday announced a mandate for a European investor roadshow ahead of a possible euro benchmark covered bond issue, with leads Deutsche, Natixis, Nordea and UniCredit.

The Norwegian issuer will hold investor meetings from 8 to 13 October, after which it may launch its first euro benchmark covered bond of the year. Eika’s most recent euro benchmark issue came in March 2014, when it sold a Eu500m (Nkr4.73bn) seven year issue.

Le noted that Nordic covered bonds spreads are still on a widening trend.

“Even though on Wednesday we had quite a constructive session we haven’t seen that translating into buying of covereds, so spreads are still slightly widening,” he said. “To see more issuance we need a few stable sessions in the broader market, and to see some buyers starting to step in so spreads can come off the recent wides.

“Hopefully we will get that.”

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