SCBC due after SR, Swedbank succeed in rough conditions

Sep 25th, 2015

Swedbank exceeded expectations with a covered bond on Tuesday after SR-Boligkreditt sold a well-received debut on Monday, and the Nordic issues were identified as being among the strongest results during a busy week in which spreads widened and many deals struggled to find demand.

Swedbank imageSeptember has been the heaviest month for euro benchmark supply in the covered bond market this year, with some Eu24bn of issuance. This week nine new issues were brought to market, totalling Eu7bn.

With oversubscription levels low and moves from initial price thoughts limited in many deals despite spreads looking generous versus secondary levels and trades sold earlier in the year, bankers cited the quantity of supply as affecting investor appetite, while spreads of the iBoxx euro benchmark index were seen as widening by some 6bp.

However, a selection of new issues were comfortably oversubscribed and found strong momentum, with syndicate officials noting those that performed the best were rarer names, such as SR-Boligkreditt, and high quality core names that offered attractive positive spreads, as did Swedbank.

“Those two went well,” said Robert Chambers, FIG syndicate manager at Crédit Agricole CIB, “and it is encouraging to see non-Eurozone deals well received in primary, with new issue premiums that are not excessive and acceptable oversubscription levels.”

Swedish Covered Bond Corporation (SCBC) is set to add further supply early next week, after having today (Friday) mandated Bank of America Merrill Lynch, Commerzbank, LBBW, Nordea and UBS for a five year euro benchmark, subject to market conditions.

Chambers noted that most of the publicly announced deals in the pipeline were executed this week, and added that with Spanish elections this weekend and the quarter-end approaching, market participants may have more clarity next week.

“But the market is still under pressure,” he said. “In covereds the main driver of that is the supply we have seen this month, and that needs to be digested before we can return to a normal market dynamic.

“The visible pipeline is now certainly smaller than it has been, and if issuance slows then it might be that investors reconsider putting their money to work, but if this trickle of deals continues it may be difficult for demand to rebuild.”

Leads Danske, Deutsche, SG, Swedbank and UBS launched Swedbank Hypotek’s Eu1.25bn (Skr11.775bn) five year deal with initial price thoughts of the mid-swaps plus 10bp area, before moving to guidance of the 8bp area after having gathered orders of over Eu1.3bn. The spread was set at 7bp before the books closed at Eu1.6bn.

Stefan Abrahamsson, funding officer at the long term funding desk at Swedbank, said the issuer went ahead with the deal despite the challenging conditions as it does not expect the market to improve this year.

“We are very pleased with the result, especially given the market sentiment,” he said.

More than 80 accounts were present in the final order books, with banks allocated 59%, central banks and official institutions 20%, fund managers 15%, corporates 4%, and others 2%. Investors from Germany and Austria took 46%, the Benelux 20%, the Nordics 11%, the UK and Ireland 9%, France 6%, Switzerland 4%, Asia 3%, and others 1%.

“We saw there were slightly fewer participants this time than in our previous transactions, and a slightly smaller order book, but that is in line with how the market has been for a while,” Abrahamsson said. “In light of that, the order book exceeded my own expectations, with the size and granularity as well.”

He said that the final price in particular represented a good result, compared with recent trades.

“We paid a new issue premium of 6bp-7bp, and that is at the tighter end of the range in the deals we have seen,” Abrahamsson said. “Premiums have come up in the last couple of weeks, so we are pleased.”

Syndicate officials away from the deal noted that the deal came substantially wider than recent deals from Swedish peers, with SEB having priced a Eu1bn seven year at 3bp through mid-swaps on 9 June, but they said this was to be expected given market conditions.

“The market has deteriorated substantially in the last one and a half months, and only in the last two weeks has it widened a couple of basis points further,” Abrahamsson said. “You cannot also, for example, compare this deal to our seven year in March, which came at minus 5bp and on which we basically paid no new issue premium, because this is a totally different market sentiment.”

Abrahamsson added that the pricing was equivalent to what the issuer could have achieved in Swedish krona, noting that the domestic market and euro market are currently roughly in line. However, he said the domestic market, like the international market, did not offer easy opportunities.

“It has been quiet in the domestic market in the last couple of weeks,” he said. “We have seen the spread has widened out, in line with international credit spreads.

“We are approaching the end of the year and I expect both the domestic market and the international market will be fairly challenging for the rest of the year.”

The new issue is Swedbank’s second euro benchmark covered bond of the year, while the issuer has also sold a $1bn five year covered bond, in May, and two senior unsecured euro benchmarks, the most recent a Eu500m five year floating rate note on 11 August. Abrahamsson said the issuer is now ahead of its funding plan.

“We will continue to monitor the market, but for the time being we are very satisfied with what we have achieved so far,” he said.

SR-Boligkreditt leads Commerzbank, LBBW, JP Morgan and Société Générale on Monday priced the Nowegian issuer’s Eu500m (Nkr4.71bn) five year debut deal at 12bp over mid-swaps, building a final order book of Eu750m comprising over 50 accounts. The deal was launched with initial price thoughts of 15bp before moving to guidance of 13bp plus or minus 1bp, on the back of more than Eu600m of orders.

“It was a very successful deal, we felt, in a difficult market,” said Dag Hjelle, CEO of SR-Boligkreditt. “Coming on the Monday, we saw that the backdrop wasn’t that good but the pipeline looks filled, so we thought there would be some first mover advantage.

“If that is correct we will see, but we are very happy with the deal, very happy with the book and very happy with the accounts, so this deal wouldn’t have been any better tomorrow.”

Syndicate officials away from SR-Boligkreditt’s leads noted a Eu500m five year issue from Norwegian peer Sparebanken Vest was priced at 7bp over mid-swaps on Tuesday of last week, and, while suggesting that the pricing strategy was appropriate given market conditions, said the 5bp pick up did not reflect a difference in the credits.

“We were uncertain on how things would develop after seeing weakening of the secondaries of the last trades, and on the back of that we decided to go out with wider pricing than we initially had in mind, but seeing how we ended I think it is a very good outcome,” Hjelle said. “Had we come in the same market as our peers we would have printed on equal terms.

“We are an inaugural issuer and we wanted to pay up a couple of basis points to make sure we had a successful deal,” he added.

The new issue was quoted as trading at 11bp, mid, on Tuesday morning, according to a banker at one of the leads.

Germany and Austria were allocated 56% of the issue, the Nordics 23%, the Benelux 10%, other Europe 6%, Switzerland 3%, and Asia 2%. Banks took 43%, asset managers 31%, central banks and official institutions 14%, corporates 8%, and insurance companies and pension funds 4%.

“It’s a very sound book, with more real money investor participation than expected,” he said. “When we now market SR-Boligkreditt further I think more lines will be open.”

Hjelle said SR-Boligkreditt intends to become a regular issuer in euros, returning to the market every nine to 12 months.

“We have no plans to launch another deal this year, but we will stay opportunistic,” he said.

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