Stadshypotek 5s equal tight in ‘unique’ euro opportunity

Mar 27th, 2014

Stadshypotek priced a Eu1.25bn five year covered bond on Monday, the joint tightest post-crisis non-German Pfandbrief euro benchmark covered bond, with an official at the issuer noting that the prevailing euro market provided a “unique” funding opportunity for Scandinavian issuers.

SvenskaHandelsbanken300More than Eu1.75bn of orders were placed for the deal, which was the Swedish issuer’s first euro covered bond since it sold a Eu1bn seven year at 9bp over mid-swaps in October. The transaction was priced at 5bp over, after guidance of the 7bp over area and initial price thoughts (IPTs) in the high single-digits over. More than Eu1bn of orders were placed in the first hour in response to the IPTs.

According to Magnus Karlsmyr, head of funding at Stadshypotek parent Svenska Handelsbanken, pricing of 5bp over equates to 25bp over Stibor, which puts the euro deal 9bp inside the issuer’s interpolated domestic level of 34bp over Stibor.

“It is very rare to get 8bp or 9bp inside the domestic curve,” he told The Covered Bond Report, “so this was a unique opportunity to get much cheaper funding in the euro space than at home.”

Excluding German Pfandbriefe, the deal joined Royal Bank of Canada and KBC as the tightest issued euro benchmark covered bonds since the onset of the financial crisis. Alex Sönnerberg, Nordic FIG DCM at Crédit Agricole CIB, noted that it was the tightest five year Nordic euro covered bond since 2007, although the all-in funding cost, being much less than in the domestic market in this instance, is more important for Swedish issuers.

The deal bodes well for other Swedish issuers looking to tap the euro market for cheap covered bond funding, he said.

“The basis swap between euros and Swedish kronor has widened by a few basis points this week, but given the lack of new issue premium required and tight secondary market levels in euros, the overall equation still makes sense for Swedish banks,” said Sönnerberg. “It’s more a questions of funding needs, as the negative carry of holding more excess liquidity would weigh on the banks’ net interest income.”

He highlighted that that there was no switching in the secondary market when Stadshypotek’s deal was announced.

“In fact we even saw better buying in some Nordic names during the session,” he said.

Karlsmyr said the deal was very successful.

“There was good momentum in the bookbuilding process and we felt positive and relaxed from the first minute,” he said.

Barclays, BNP Paribas, Nomura, Svenska Handelsbanken and UBS were lead managers.

A syndicate official at one of the leads said that the deal was priced without a new issue premium.

“Starting off with high single digits gave us good momentum,” he said. “The first revision at 7bp over was to test the waters for going tighter, and the order book gave us this ability.”

He added that the issuer did not want a huge transaction, but was rather looking to set a new benchmark point on its covered bond curve.

“This was successful transaction, and as it is coming through Nordea, this is a strong statement from Svenska,” said the syndicate official. “In terms of pricing we were looking for a Eu1bn print, but given the size and quality of the book it was upsized.”

Bank treasuries were allocated 55%, central banks and official institutions 25%, asset managers 15%, insurance companies and pension funds 2%, and others 3%. Germany and Austria took 47%, the UK and Ireland 16%, the Benelux 9%, the Nordics 8%, France 7%, Switzerland 6%, Asia 2%, and other European jurisdictions 5%.

A syndicate official away from the deal said that a supportive market with a lot of liquidity had allowed the leads to price the deal so tightly.

According to Karlsmyr, the decision to come to market had been made in the middle of last week, with the lead manager group chosen and briefed on Friday.

A lack of euro supply and infrequent issuance from Scandinavian financial institutions in general and Stadshypotek in particular paved the way for a successful deal, he added.

“Usually we are of the view that pricing is more important than size, but we also want to be able to leave something for the secondary market,” he said. “So we don’t like to squeeze pricing too hard, and this time, we feel that we managed that well.”

Karlsmyr said that the bank has no immediate plans to return to the market but that it wants to be a regular issuer.

“Absolutely, we will look at the market again,” he said. “Usually we try to come to the euro benchmark market one, two, three times a year.”

Finland’s Aktia Bank, meanwhile, on Tuesday began a euro covered bond roadshow that will run until next Thursday (3 April). Commerzbank, JP Morgan, LBBW, and Nordea Markets have the mandate.

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