Stadshypotek Finnish covered kick-off draws Eu1.5bn amid pulled deals

Stadshypotek issued its first covered bond out of a Finnish cover pool today (Tuesday), selling a thrice-subscribed Eu500m 10 year issue that progressed smoothly, in contrast with more turbulent conditions in other markets, with NordLB pulling a senior trade amid pressure on European banks.

After announcing a mandate for a Eu500m (Skr4.8bn) no-grow 10 year issue yesterday, Stadshypotek leads Barclays, Deutsche Bank and Handelsbanken launched the deal this morning with initial price thoughts of the 5bp over mid-swaps area, before moving to guidance of the 2bp area on the back of over Eu1bn of orders. The deal was then re-offered at flat to mid-swaps, with the book closing at Eu1.5bn.

“It’s a strong result, for what is in effect a debut,” said a syndicate banker away from the leads. “It’s gone very smoothly, almost in direct contrast to what is going on in the senior market today.”

Bankers said wider market conditions had today remained challenging following a soft start to the week, noting that equities had rallied across Europe at the open this morning, before falling bank shares – led by Deutsche Bank – reversed the gains.

NordLB published a mandate for a seven year euro senior unsecured issue yesterday morning. However, the issuer announced this morning that it had decided not to proceed with the deal, due to current market conditions, and thanked investors for their interest. This came after Deutsche Lufthansa pulled a Eu500m seven year issue yesterday, citing dissatisfaction with the pricing achievable in the market.

“It is split among asset classes,” said a syndicate banker. “SSAs work well, covereds work well, but in the senior and corporate markets it appears to be difficult – particularly for names with questionable pricing and background.

“The German banking sector is under a lot of pressure – with the Bremer Landesbank merger story affecting NordLB, and elsewhere the Commerzbank restructuring, the Deutsche Bank restructuring rumours, and also Deutsche’s potential capital needs. It’s really not a market for senior right now.”

Stadshypotek’s new issue is its first covered bond to be sold from a Eu5bn Finnish cover pool, whereas all of the Swedish issuer’s previous euro-denominated covered bonds have been backed by a domestic pool.

Stadshypotek’s previous issuance was nevertheless cited as the most relevant comparables, given that the deal was issued under Swedish legislation and is – unlike Finnish covered bonds – ineligible for the ECB’s covered bond purchase programme. The Finnish-backed issuance is eligible for ECB repo and, like issuance out of Stadshypotek’s domestic pool, rated Aaa by Moody’s.

Syndicate bankers said the deal offered a new issue premium of 3bp-4bp, citing outstandings from Stadshypotek’s Swedish pool – with its February 2023s seen pre-announcement at minus 5.8bp, mid, June 2022s at minus 5.3bp, and November 2021s at minus 8bp.

They said this was in line with the premiums offered by recent comparable covered bond supply.

“It doesn’t look like they paid up substantially either for the peculiarity with the collateral nor the wider market weakness,” said one. “It was a sensibly defensive start, but they ended up with a good price.”

Bankers estimated that the deal was priced around 6bp back of where a new 10 year Finnish covered bond would have been priced, citing Nordea Bank Finland March 2027s at minus 11bp, mid. They said this was in line with the differential between Finnish paper and Swedish paper in more frequently tapped shorter maturities.

Stadshypotek’s Finnish cover pool is 98.2% comprised of residential mortgages and 1.8% public sector loans, according to an investor presentation dated this month.

The new issue is also the Svenska Handelsbanken subsidiary’s first euro benchmark covered bond with a 10 year maturity, with Swedish issuers having generally preferred issuance in the five to seven year part of the curve, which better matches their collateral.

“This does illustrate the general issuer preference to print longer maturity covered bonds rather than deals at a negative yield to maturity,” said Maureen Schuller, head of financials research at ING. “None of the Swedish covered bonds outstanding currently offer a positive yield to maturity.”

Syndicate bankers suggested that demand for the deal was boosted by the rarity of 10 year Swedish paper.

Schuller added that it is the first time that Stadshypotek has issued three euro benchmark covered bonds in the space of a year.

“This may come at the expense of the additional annual euro benchmark size issuance in the senior unsecured or subordinated space, as seen by Svenska Handelsbanken in the past few years,” she said.

Bankers said the difficulties in the senior unsecured market could persuade issuers to tap the covered bond market in the coming weeks.

“These examples at least show that the market is not a one-way street anymore,” said one. “We, need to be more cautious about what to do when and at which level, in the covered bond market also.

“But for the time being covereds are OK, as we see with the Stadshypotek trade. It could be one outcome of the current situation that some issuers that were considering something in the senior format come back to covereds.”

Image: Svenska Handelsbanken