SpareBank 1 hits sweet spot to build Eu1.7bn book for covered threes

Nov 6th, 2015

SpareBank 1 Boligkreditt amassed a book of over Eu1.7bn for a Eu1.5bn three year covered bond yesterday (Thursday) that bankers said showed strong demand for shorter dated paper, with the Norwegian deal standing out amid a slew of five to seven year supply as the equal-largest three year of 2015.

SpareBank 1Of some 60 euro benchmarks to have been launched since late August, only two before SpareBank 1’s issue were three years – a Eu500m issue from NordLB Luxembourg on Thursday of last week (29 October) and a Eu500m deal for DG Hypothekenbank on 2 September – while the new issue is the equal-largest three year of 2015, alongside a CFF issue in June. The Norwegian issuer’s deal is also the first three year euro benchmark from a Nordic issuer since 2011.

Eivind Hegelstad, COO and head of investor relations at SpareBank 1 Boligkreditt, said one reason SpareBank 1 opted for the maturity is that it expected demand to be slightly weaker for five to seven year deals after the heavy supply in that part of the curve, also noting that SpareBank 1 had issued a Eu1bn seven year deal in August and already has two bonds maturing in 2020. He added that SpareBank 1’s last three year euro benchmark issue was in 2009.

“We thought long and hard about it,” he said. “We were then deciding between a three year, a four year and a long seven, but it became clear that the three year would be the best option to go for the size.

“We wanted to hit that sweet spot that no one else had utilised for a long time.”

SpareBank 1’s deal was launched into supportive market conditions, syndicate officials said, after euro benchmarks from CaixaBank and apoBank in the five year part of the curve met encouraging demand on Wednesday.

Leads Credit Suisse, HSBC, ING and UniCredit announced the three year issue with guidance of the 12bp over mid-swaps area, before fixing the re-offer at 10bp on the back of Eu1.45bn of orders. The book closed at Eu1.74bn, before the leads and issuer decided to set the size of the deal at Eu1.5bn.

“There was some debate about whether to print Eu1.25bn or Eu1.5bn,” said Hegelstad, “but the quality of the order book was so high – with many central banks in there, very few inflated orders, and even some bank treasuries that made it clear to us that they wanted their full fill – that we decided we could take Eu1.5bn out of it.

“We feel the deal went very well and we are very happy with the response from investors.”

Banks were allocated 55% of the deal, asset managers 26%, central banks and official institutions 14%, pension funds 4%, and other 1%. Accounts from Germany and Austria took 40%, the UK and Ireland 15%, the Nordics 14%, France 10%, the Benelux 9%, Switzerland 4%, Eastern Europe 4%, Asia 3%, and others 1%.

Syndicate officials away from the leads agreed the deal had gone well, attributing what they described as an impressive level of demand to the deal’s maturity.

“What jumps off the page is the size of the deal and order book, which, without ECB support, is all real demand,” said Robert Chambers, FIG syndicate manager at Crédit Agricole CIB. “That book shows that there’s a lot of liquidity to put to work at the front end in covereds, where we haven’t seen much recent supply, with most issuers looking to extend duration given how flat credit and swap curves are.”

Syndicate officials away from the leads also said the deal looked attractive because it offered a new issue premium of around 7bp, with SpareBank 1 2019s quoted at around 6bp, bid. They noted that this is roughly in line with the concessions paid on recent longer dated deals from core and Nordic issuers.

Hegelstad said he believed SpareBank 1 had the option of tightening the spread further, but had decided against it.

“Given the strong demand in the book, we could have set a lower price and taken a Eu1.25bn deal, but we wanted the size and as we started straight out with guidance it may have been unusual to tighten by more than 2bp,” he added. “We thought that was the decent thing to do and not take it further down.”

The final spread was around 10bp cheaper for SpareBank 1 than it would have been able to achieve with an equivalent dollar deal, Hegelstad added.

The new issue is SpareBank 1’s second euro benchmark this year after the September 2022 issue, which was in turn its first since November 2013.

Hegelstad noted that SpareBank 1 had issued around three or four euro benchmarks per year up until 2014, when it had paused issuance because of an inflow in deposits and because its parent banks had good opportunities in other markets.

“Going forward, we’re probably not going to issue four bonds per year,” he said, “but we will be a regular issuer, with at least one euro benchmark in the market every year.”

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