Stadshypotek sells $1.5bn seven year covered, Swedbank in US senior first

Sep 27th, 2012

Svenska Handelsbanken subsidiary Stadshypotek priced the longest dated Yankee covered bond since the financial crisis on Tuesday, a $1.5bn seven year deal that came only two business days after the issuer made its Kangaroo debut, while Swedbank made a $1bn senior dollar debut.

Stadshypotek’s $1.5bn (Eu1.16bn/Skr9.84bn) deal is the third new US dollar benchmark covered bond this month, while a $1.25bn increase to a National Australia Bank deal last week added to September’s supply.

The benchmark is the Swedish issuer’s first in the US market since 2010, when it opened the Yankee market for Nordic issuers, and the longest dated US dollar covered bond since the collapse of Lehman Brothers, with five years having been the limit so far.

Leads Barclays, Deutsche Bank, Bank of America Merrill Lynch and Morgan Stanley gathered more than $2.7bn of orders on the basis of guidance of the 75bp over area, and were able to price the issue at 72bp over given a lack of price sensitivity in the order book, said a lead syndicate official. The transaction was bid 2bp inside re-offer on Tuesday afternoon, he added.

A lead order for seven year paper from the issuer provided an impetus for the deal, with the leads thereafter soft-sounding a select group of Asian accounts overnight from Monday to Tuesday, according to the syndicate banker.

The order books were opened early Tuesday morning NY time, with an outstanding Stadshypotek September 2013 issue trading at around 18bp over at the time and the longest dated outstanding Nordic US dollar covered bonds quoted in the low 60s mid, said the lead syndicate banker.

A syndicate official away from the leads said that Stadshypotek took advantage of an ever decreasing GSE market and a general supply and demand imbalance.

“A $3bn order book finally confirmed that like other markets the covered bond space attracts a far-reaching investor base that over the years has got more and more comfortable with the asset class,” he said.

Another said that a couple of dollar deals are in the pipeline earmarked for execution over the coming weeks, and that Stadshypotek’s extension of the yield curve had attracted attention from issuers.

“The market is very strong and there is a bit of weakness in the broader credit market so more execution risk on the senior unsecured side may convince some issuers to go for covered bonds,” he said.

He put the pricing of Stadshypotek’s deal at 9bp-12bp wide of euro equivalent levels, and said that he had heard there was some frustration about allocations that would have stemmed from there being a large lead order and the issuer not wanting to do a larger deal.

“It’s a good problem to have,” he said. “It was a very good trade.”

The dollar activity contrasted with euros, where the only benchmark covered bond was a Eu500m seven year Pfandbrief for Deutsche Hypothekenbank, which met with muted demand.

“The US dollar market demonstrated strength this week and has been very favourable for a lot of European banks while conditions were challenging in the euro market,” said Vincent Hoarau, head of FI, covered bond and ABS syndicate at Crédit Agricole CIB.

“It would not be surprising to see additionaly Yankee supply at the lower end of the spectrum in the coming weeks.”

After a A$750m (Eu603.5m/Skr5.12bn) Kangaroo covered bond on Friday, Stadshypotek’s US dollar deal means that the issuer has raised $2.2bn equivalent of non-Swedish krona benchmark covered bond funding in three days.

“It was nice that we were able to find two windows in such a narrow timeframe,” said Thomas Åhman, deputy head of treasury at Handelsbanken, Stadshypotek’s parent. “It is not that easy to plan our covered bond issuance when it comes to international markets given the different moving parts, so you have to be somewhat opportunistic.”

The Swedish market is Stadshypotek’s core market when it comes to covered bonds, with long term diversification driving overseas transactions that the issuer will only pursue if they offer all-in costs roughly in line with domestic funding levels, said Åhman.

“We have to be comfortable that the all-in costs equal Swedish krona levels plus/minus 5bp-10bp,” he said. “We will never pay up anywhere in the region of 20bp or more.

“We hadn’t found a window to go to the US market until now in terms of those all-in costs.”

At 72bp over mid-swaps the pricing on the $1.5bn issue did not offer arbitrage, according to Åhman, but was roughly in line with levels in the Swedish market for the same maturity.

He said that reverse enquiries gave the issuer the confidence that it could achieve its size and pricing targets for a US dollar benchmark, with much of the demand centred on the seven year maturity that Stadshypotek was after.

“The seven year maturity was unchartered territory for the US market, but the reverse enquiries gave us the comfort to go ahead,” he said.

US accounts took 87% of the bonds, Europe 10%, and others 3%. Asset managers were allocated 83%, insurance companies and pension funds 7%, SSAs 7%, banks 2%, and others 1%.

Stadshypotek’s Kangaroo debut on Friday was also fuelled by an analysis that all-in costs had at last reached levels that justified tapping the Australian market.

“It was a combination of spreads tightening after the summer and the basis swap moving in the right direction,” said Åhman, “so we found a window there.”

The deal came less than 10bp wider than Australian domestic covered bonds, according to Åhman, with the issuer paying up 5bp-10bp compared with the Swedish market.

“Because it was a debut we were willing to pay a bit more than we would usually,” he said.

The A$750m deal was a five year dual tranche issue, split between a A$450 floating rate note and a A$300m fixed rate deal. The tranches were priced at 105bp over 90 day BBSW and mid-swaps, respectively, via Commonwealth Bank of Australia, HSBC, RBC Capital Markets and Westpac.

A lead syndicate official said that the deal went “extraordinarily well”, and that it was notable for being the first Kangaroo covered bond that did not involve domestic balance sheets.

The offshore component was very strong, at 45%, he said, compared with only around 20% on a domestic Westpac issue or deals for DNB or Canadian Imperial Bank of Commerce (CIBC) last year.

“But the real interesting factor was that 75% went to real money accounts,” he added, “up from a 30%-40% allocation with other Kangaroo names.

Australia took 55%, Asia 32%, and Europe 13%. Fund managers were allocated 75%, private banks, 18%, banks 4%, and central banks 3%.

Swedbank priced its inaugural US dollar senior unsecured deal on Monday, a $1bn five year issue that was priced at 150bp over Treasuries via leads Citigroup, Bank of America Merrill Lynch, Barclays, BNP Paribas, and JP Morgan.

A lead syndicate banker said that orders were just in excess of $2.6bn and would have supported a larger deal had the issuer not wanted to stick with the $1bn size, in part given pricing that was slightly wide of euro equivalent levels.

“It was a very successful trade,” he said, “and a good day to be in the market with things softening since.”

The bonds have widened 7bp-8bp, in line with the market, according to the syndicate official.

The Swedish issuer was one of three Yankee issuers in the market, with Canadian Imperial Bank of Commerce and Crédit Agricole tapping the market for $1bn apiece in three and five years, respectively.

Secondary market spreads for Nordea, as the Scandinavian issuer with the largest volume of outstanding senior dollar deals, served as the main comparable, said the lead syndicate official, with Swedbank managing to price flat to Nordea.

“That’s a good outcome given that in euros Nordea tends to trade tighter,” he said, “and it’s down to the demand from US investors for new names in the Yankee market.”

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