Stadshypotek gets attractive funding with FRN

May 16th, 2014

Stadshypotek launched a rare euro floating rate covered bond this (Friday) morning, a Eu300m five year issue that was launched opportunistically in response to interest in the format from investors, with the deal providing the issuer with attractive funding versus its curve, according to a lead syndicate banker.Svenska HandelsbankenOLYMPUS DIGITAL CAMERA

Leads Crédit Agricole and Credit Suisse priced a Eu300m five year issue for the Svenska Handelsbanken subsidiary at 12bp over three month Euribor, in line with guidance of the 12bp over area. The deal is thought to be the first sizeable publicly placed euro covered bond in floating rate note (FRN) format since Italy’s UniCredit priced a Eu500m three year FRN at 57bp over in January as part of a dual tranche transaction that otherwise comprised a Eu1bn 10 year fixed rate tranche.

Sizeable floating rate notes are unusual in euro covered bonds, although the format is standard in other currencies such as sterling. In coming to the market with a floating rate issue today Stadshypotek was opportunistically responding to interest in the format from some accounts, said Viet Le, financial institutions and covered bond syndicate manager at Crédit Agricole CIB.

“It’s attractive for bank treasuries from a hedging and repo haircut standpoint,” he said.

At 12bp over, Stadshypotek’s FRN is providing the Swedish issuer with attractive funding versus its outstanding curve, he added.

A syndicate banker away from the leads said the Stadshypotek deal was something of an “experiment”.

Florian Eichert, senior covered bond analyst at Crédit Agricole CIB, said that fixed rate mortgages make up slightly less than 40% of Stadshypotek’s cover pool based on 2014 fourth quarter data from Moody’s, and emphasised the benefits of issuing in floating rate format.

“Natural matching of assets and liabilities is a good idea,” he said, “because otherwise issuers have interest rate risk to hedge, which implies costs and also counterparty risk, with the former not being high on issuers’ wish-lists and the latter at the bottom of rating agencies’ wish-lists.”

Another benefit of FRNs over fixed rate issuance is lower price volatility, according to Eichert, while a lack of index eligibility and a potentially smaller investor base represent disadvantages.

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