Stadshypotek Eu1.25bn 7s face mixed CBPP3 dynamics

Sweden’s Stadshypotek set a new post-crisis tight for non-Eurozone seven year covered bonds with a Eu1.25bn issue at 2bp through mid-swaps on Monday, and an official at the issuer said the result was encouraging, even if technicals – in the shape of CBPP3 – are in his eyes outweighing credit quality in relative pricing.

The deal came amid a flurry of primary market activity from Eurozone issuers eligible for CBPP3, with Spain’s Banco Sabadell, France’s Compagnie de Financement Foncier (CFF) and BNP Paribas Home Loans SFH, and Italy’s UBI Banca having issued euro benchmarks since last Friday. CFF’s Eu1.5bn seven year issue set a new tight for non-German euro benchmarks on Monday with a re-offer spread of 5bp through mid-swaps.

Thomas Åhman, deputy head of treasury at Svenska Handelsbanken, Stadshypotek’s parent, said that the timing of the new issue was based on the issuer’s usual policy regarding covered bond issuance in foreign currencies.

“When we are issuing covered bonds in currencies other than the Swedish krona, it’s not about raising new liquidity, it’s about long term diversification,” he said. “But when we do that diversification we need to find windows where the euro market, for example, is at an all-in cost comparable to the Swedish market.

“This means that first we need to look at where we think spreads are in euros, and then you have the basis swap into the Swedish krona, and then you have spreads in the Swedish market. At this time we saw that euros was on a par with Swedish krona, and that’s why we decided to issue in euros.”

Covered bonds in general but especially those from Eurozone issuers eligible for CBPP3 have rallied since the programme was announced at the beginning of September. The ECB announced on Monday afternoon that CBPP3 purchases settled up to last Friday – which only constitute secondary buying given that no eligible primary deals had settled by then – reached Eu4.779bn, up Eu3.075bn from a week earlier, representing an increased rate of buying even taking into account the previous week’s total only having covered three days of the programme.

Åhman said the tightening of the market on the back of CBPP3 had helped euro levels become competitive, but that while spreads had been getting lower the basis swap between Swedish kronor and euros had been going in the opposite direction.

“That is why it is so difficult to plan issuance in euros,” he added. “It’s getting a little bit three dimensional and these things are moving all the time.”

Swedish krona spreads had meanwhile been relatively stable, although slightly tighter over the past month, he said.

On Monday morning leads BNP Paribas, Deutsche, HSBC, Nomura and Svenska Handelsbanken went out with initial price thoughts of the low single-digits over mid-swaps, then set guidance at flat area, before fixing the spread at 2bp through, which Åhman said was in line with his initial expectations of somewhere around flat to minus something.

“But then of course it is a little bit harder to pencil that in as well, because we are not a euro-in, which means we are not going to have huge orders in our order book from the ECB,” he added. “Even though we clearly think that our credit is maybe much stronger than another covered bond issuer, you clearly see a difference in dynamics when the ECB is coming in for them and buying huge clips at almost any price. If you make a direct credit comparison between covered bonds, it’s quite clear that the market is pricing in technicals over credit quality.

“But even though we didn’t have the central bank support, we still had a really good order book with real money investors in it, which was of course really encouraging and we are really happy with the result.”

Stadshypotek had a book of Eu2.1bn with 84 accounts, with CBPP3-eligible issues of the past week typically having attracted over Eu3bn of orders, including chunky Eurosystem orders reportedly of as much as Eu700m.

Germany was allocated 41% of Stadshypotek’s deal, the UK 21%, France 19%, Switzerland 5%, Asia 4%, the Nordics 4%, and other Europe 4%. Banks took 58%, fund managers 31%, central banks and official institutions 7%, insurance companies and pension funds 4%.

Åhman said that the Eu1.25bn size was in line with the issuer’s initial plans and its typical euro benchmark sizes.

SCBC recently became the first Swedish issuer to use a soft bullet covered bond, and Stadshypotek is considering making the change, according to Åhman.

“There is a fair chance that it can happen,” he said, “but we haven’t taken that decision yet. But as I see it, hard bullet or soft bullet, the market doesn’t seem to see a difference between them when it comes to pricing.”