‘Peculiar’ four year €1bn SEB FRN exceeds expectations

May 20th, 2016

SEB sold a €1bn senior unsecured FRN with an uncommon four year maturity on Wednesday, opting for this partly to tap a part of the curve vacated in light of upcoming TLTROs, according to SEB’s John Arne Wang, with eventual demand of over €1.3bn surpassing expectations.

AppSEB_kungstradgardenSupply in the four year part of the curve has been limited in recent months, and market participants said many Eurozone issuers were opting for other maturities given the launch of a new series of four targeted longer-term refinancing operations (TLTRO II) by the ECB.

The new operations, which will be conducted from June, will have a four year maturity. The ECB said borrowing conditions in these operations can be as low as the interest rate on the deposit facility, which is currently at minus 0.40%.

“The rationale for going into four years – which admittedly is bit of a peculiar maturity for a euro FRN – was that such a transaction would fit well with our balance sheet needs, besides we have already filled up our five year bucket,” said John Arne Wang, head of funding and liquidity management at Skandinaviska Enskilda Banken (SEB).

“That it also matched with the TLTRO II maturity was seen as helpful in order to get more investors involved.”

Wang said SEB is unlikely to participate in the TLTROs, although its German and Baltic subsidiaries are eligible for the operations.

“For a transaction that was typically targeting a smaller part of the senior market, the demand was higher than expected,” he added. “The deal therefore got very positive momentum and we were accordingly able to set the price at quite a competitive level.”

Leads Credit Suisse, Nomura, SEB and UBS launched the €1bn (SEK9.26bn) four year FRN with initial price thoughts of the low 50s over three month Euribor, then moved to guidance of the 48bp area plus or minus 1bp, before fixing the spread at 47bp. The book peaked at around €1.5bn, and closed at over €1.3bn, with over 110 accounts participating.

The deal was priced above par, at 100.525, with a coupon of three month Euribor plus 60bp to compensate for the negative three month Euribor rate.

Syndicate officials away from the leads said the deal had done well to attract such demand given the unusual maturity.

“There hasn’t been much supply in these maturities, given the upcoming TLTROs, so there good demand,” added one. “For non-Eurozone issuers it makes a lot of sense to be issuing in this part of the curve.”

“It looks a good deal all round, and it’s performing well on the secondary market.”

Asset managers bought 42.9% of the deal, banks 24.3%, central banks and official institutions 16.3%, insurance companies and pension funds 14.3%, and others 2.3%. Accounts in Germany and Austria took 32.6%, the UK and Ireland 15.5%, the Nordics 12.1%, southern Europe 10.9%, France 8.8%, the Benelux 8.5%, Switzerland 4.2%, the Middle East 4%, Asia 2.9%, and others 0.4%.

“It is interesting to note that asset managers bought such a large share,” Wang said. “With other FRNs, banks have been more dominant.

“This gave a clear impression that there is quite a large cash build-up with some asset managers.”

The deal is SEB’s second euro-denominated senior benchmark of the year, following a €1bn long five year fixed rate issue in February. The Swedish banks has sold one benchmark non-domestic covered bond in 2016, a €1.5bn five year issue, also in February.

Wang said SEB will likely return to the market in the second half of 2016 with a second US dollar-denominated benchmark of the year, as well as possibly adding another euro benchmark covered bond.

“But it all depends on our needs and developments in the market,” he said.

Norway’s SR-Boligkreditt today (Friday) began a European roadshow ahead of a potential euro benchmark covered bond issue. Citi, Commerzbank, HSBC, LBBW and Nomura have the mandate.

The deal would be SR-Boligkreditt’s second euro benchmark covered bond of the year, following a €500m seven year issue in January.

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