Sparebanken Sør well positioned after Eu500m debut

Sparebanken Sør Boligkreditt made its euro-denominated covered bond debut on Tuesday – joining the market to meet increased funding needs, according to the issuer’s CEO – and bankers said the Eu500m five year issue positioned the Norwegian issuer well next to its peers.

Sparebanken Sør Boligkreditt, a subsidiary of Sparebanken Sør, had previously only issued Norwegian krone-denominated covered bonds in the domestic market, with some Nkr22bn outstanding.

Marianne Lofthus, CEO of Sparebanken Sør Boligkreditt, said the issuer decided to make its euro debut because, following a merger between Sparebanken Sør and Sparebanken Pluss in January 2014, the group’s funding needs had outgrown the volumes available in the Norwegian bond market.

“After the merger, Sparebanken Sør is a much larger unit, and in fact too large for the domestic market,” she said. “We have joined the euro market to diversify our funding and enlarge our investor base.”

Sparebanken Sør began marketing the debut deal last week, holding investor meetings across Europe.

“Of course with this being an inaugural transaction it was not certain how it would function, especially given how markets are rather volatile,” said Lofthus. “But after meeting investors, and after Draghi’s announcement in respect of QE, we were even more confident.

“The proof is in the pudding, as the transaction went very well.”

After announcing a mandate last Friday, leads Danske, LBBW, Nordea and UniCredit launched the Eu500m no-grow five year issue on Tuesday with guidance of the 25bp over mid-swaps area, before moving to guidance of the 23bp area on the back of books “well above” Eu800m. The deal was then re-offered at 22bp with the book closing at Eu1bn, with more than 60 accounts.

A syndicate official at one of the leads said the new issue was a particularly good result considering it is the fifth Norwegian euro-denominated benchmark of the year, following deals from DBN Boligkreditt and SR Boligkreditt in January and more recent deals from Sparebanken Vest and SpareBank 1 Boligkreditt on 24 February and 2 March, respectively.

“This is a very nice result for a debut deal,” he said. “This is a small, not very well-known issuer, and they came after we have already seen quite heavy Norwegian supply, which is not easy, but in the end it was a very good execution and hit each of the issuer’s targets.”

Lofthus said the diversity and high quality of the order book was a highlight of the deal.

Banks were allocated 55% of the deal, asset managers 26%, central banks and official institutions 18%, and insurance companies and pension funds 1%. Accounts from Germany and Austria took 45%, the Nordics 29%, the Benelux 11%, Eastern Europe 4%, Italy 3%, the UK and Ireland 3%, Iberia 2%, and others 3%.

“We are also rather satisfied with the price, and to be honest we had a chance to get an even tighter spread of closer to 20bp,” Lofthus added. “The momentum, with investors clearly considering this to be a good investment, could have supported a tighter price, but we decided to leave more on the table for the investors.

“It’s a good price compared to where the other Norwegian covered bond companies are quoted.”

Syndicate officials disagreed on which of Sparebanken Sør’s Norwegian peers were the most appropriate comparables, with some away from the leads citing SR Boligkreditt, as it is also a less established name, and quoting its September 2020s as trading in the low 20s, mid.

Other syndicate officials at and away from the leads said Sparebanken Vest is the closest match to Sparebanken Sør in terms of credit quality, and saw its March 2021s at 16bp, mid.

“In time these issuers will trade close together,” said the lead syndicate official. “If you take the 18bp level at which Vest’s March 2021s were priced as fair value, and think that Sparebanken Sør has added a couple of basis points for the setting up of credit lines, as is appropriate with a debut, then 3bp-4bp premium is a good result.”

Lofthus added that much of the focus of the preceding roadshow was on the state of the Norwegian economy and the impact of persistently low oil prices.

“We had a good story to tell, as our parent bank has very limited direct exposure to the oil sector,” she said. “We are not in oil, we are not in shipping, we are not in fish farming – or in any volatile sectors at all.

“Of course, our region and Sparebanken Sør, among other banks, will be affected by changes in the Norwegian economy. Still, one should be aware that the Norwegian economy has several shock absorbers in place to handle the situation.”

Lofthus cited low interest rates, a weak Norwegian krone and fiscal stimulus as counterbalancing economic slowdown stemming from the lower oil investments.

“The Norwegian government has a strong financial position with a large budget surplus,” she added. “The government pension fund provides the government with substantial economic leeway.”