SEB hits slim window, SCBC ‘realistic’ as volatility returns

SEB took advantage of a window of stability early this week to issue a Eu1bn (Skr9.36bn) seven year covered bond on Tuesday, but both it and SCBC, which launched a Eu500m seven year into a deteriorating market on Thursday, had to revise their pricing expectations.

Canada’s Toronto-Dominion Bank on Monday reopened the euro benchmark covered bond market to non-German issuers after five weeks into which – with the exception of a disappointing Eu750m Banco Sabadell issue – only sub-Eu1bn Pfandbriefe had been launched. The reopening came on the back of relatively stable yields after a second sharp back-up in Bund yields last week.

However, with market participants still cautious, TD priced its Eu1.25bn five year deal with a new issue premium of as much as 7bp.

John Arne Wang, head of treasury management at Skandinaviska Enskilda Banken (SEB), said that the issuer had been watching the market and trying to pinpoint a period of two or three days of stability in which to launch a new euro benchmark – its first since October 2013 – and targeted launch at the beginning of this week. However, it decided to hold off until TD was out of the way after the Canadian bank entered the market early on Monday morning.

“That deal worked,” said Wang, “but admittedly at a much higher new issue premium than we had anticipated.”

He said that TD’s execution was also relatively slow, but amid concerns that the pipeline was growing, the Swedish issuer decided to take the opportunity to proceed.

“The general feeling was that we issue now, or probably wait weeks or even into Q3,” said Wang. “It was not an easy decision to go ahead.

“But given positive investor feedback we were fairly confident that we could get a good deal done, even if we were worried about the possibility of intra-day volatility and the fragile market.”

Alongside France’s Compagnie de Financement Foncier – which was targeting the first euro benchmark covered bond in the three year maturity since January as yields at the short end moved back into positive territory – SEB therefore announced its mandate on Monday and entered the market on Tuesday morning, when Royal Bank of Canada proceeded to announce a seven year for expected execution on Wednesday.

SEB leads Crédit Agricole CIB, Commerzbank, HSBC, Nomura and SEB built a book of over Eu1.3bn for the Eu1bn seven year issue and priced it at 3bp through mid-swaps after having gone out with IPTs of the flat area and guidance of minus 2bp (+/-1bp).

Robert Chambers, FIG syndicate at Crédit Agricole CIB, put the new issue premium at 3bp-4bp, citing SEB April 2021s bid at around 7bp through and the curve extension to the new issue as putting fair value at 6bp-5bp through.

“It’s a good result,” he said. “We managed to get some price tension in spite of the competing supply in and around the market.

“The new issue premium was tighter than on the TD trade, with the smaller size and scarcity value of SEB contributing to this.”

Wang said the he is happy the issuer went ahead with the trade, even if the level was above that initially anticipated before TD had reopened the market with its high new issue premium.

“Yes, we could have possibly seen a better outcome earlier this year, but for this week the result was quite strong and shows how well the SEB credit is perceived,” he said. “And looking back at the week, Monday and Tuesday were the only days that worked, and it was positive to be earlier on in the pipeline.”

Indeed Bund yields began rising again late on Tuesday and on Wednesday passed 1% for the first time this year. This hit execution of RBC’s Eu1bn seven year issue on Wednesday, when pricing was unmoved from IPTs to re-offer at 2bp over and the last book update was only around Eu750m.

The Swedish Covered Bond Corporation, SBAB’s subsidiary, had meanwhile on Wednesday morning announced a mandate for a seven year issue and it pressed ahead with its issue on Thursday even though some market participants had suggested that further new issues be delayed. It was joined in the primary market by the UK’s Yorkshire Building Society, which launched a Eu500m five year after finishing a roadshow.

Citing strong investor feedback, SCBC leads Citi, Danske, Goldman Sachs, HSBC and Société Générale began taking IOIs with initial price thoughts of the 2bp over mid-swaps area. That level was maintained as guidance, after the leads gathered orders of over Eu500m, and the pricing was left at 2bp for the re-offer and the deal size at Eu500m.

“They have not exactly struggled, but they have not enjoyed the usual levels of support,” said a syndicate official away from the leads.

Another said SCBC had at least adopted the right approach to the market.

“As long as an issuer is realistic, like SCBC has been, and takes the view that they can move with the market and that they aren’t bigger than the market, then they can get a trade done,” he said. “SCBC didn’t try to achieve Tuesday’s pricing, and that was the right thing to do.”

Johan Dernmar, funding manager at SBAB, said that the issuer was satisfied with the outcome given the backdrop.

“We had been monitoring the market for some while and seen that secondaries hadn’t been moving,” he said, “and even though we saw that some previous trades didn’t go that well we thought that it might be even worse in the coming weeks and months, so we thought that we’d take a shot and hopefully the market would be there to support us, and it did for a Eu500m deal.

“Of course it wasn’t the ideal market backdrop to issue a euro covered bond, but still, we got a decent trade done and we are in a position that we have liquidity now for quite some while and if the markets are even worse we are in a comfortable position.”

He cited the movements in rates and the escalation of the Greek crisis as potential catalysts for further volatility, as well as noting that funding will be difficult during the approaching summer break.

Dernmar was philosophical about coming 5bp wider than Swedish peer SEB just two days later.

“They got a decent deal done and we had the ambition to follow up on that deal,” he said, ”then we had RBC coming in between and struggling to get a decent deal done. Of course, we are a bit dissatisfied by the fact that they are pricing 5bp inside us, but looking at where the secondaries are trading, both SEB and RBC, the plus 2bp we ended up with today was where the market is.

“We try to see everything with clear eyes and this was what the market offered us today, and in that context we are satisfied with getting a very good healthy book with high quality investors even if it didn’t grow much beyond Eu500m.”

Developments in the domestic Swedish covered bond market also played into the timing of SEB’s and SCBC’s euro benchmarks. SEB had been targeting a return to the euro covered bond market this year, communicating that it would definitely issue a benchmark of seven years or longer.

“We moved sooner rather than later because the Swedish market has been slower than anticipated,” said Wang at SEB. “The Swedish market has always worked apart from perhaps one day during the Lehman crisis, but with the negative rates we have seen a different dynamic, with investors not as keen to engage.

“Long term, I don’t think that investor behaviour is changing significantly, but in the medium term it is more challenging. We therefore preferred to bring forward our euro plan to add an amount equal to a euro benchmark before the end of the second quarter, even if we are still quite liquid.”

Dernmar also cited lower demand in the local Swedish market as a reason for turning to euros, noting that the pricing on the benchmark was in line with where the domestic market is trading.

“We have been seeing Swedish covered bonds widening out for quite some time as well, with rates having been going up as in euros and people cautious about putting on new positions ahead of the summer,” he said. “So even if we wanted to raise the funding in Swedish kronor, I am not sure that we could get the same kind of volume out of the market today as we did for this euro transaction.”