Stadshypotek recovers after ‘ill-advised’ IPTs prompt widening

Mar 14th, 2013

An official at Stadshypotek said that the end result of a Eu1bn long five year covered bond benchmark on Tuesday was satisfactory, even though guidance had to be widened 5bp from initial price thoughts suggested by banks that turned out to be too aggressive.

In a rare move Stadshypotek’s leads — Danske, Deutsche Bank, SG and Svenska Handelsbanken — widened guidance some 5bp in response to investor pushback to IPTs of the high-single digits over mid-swaps area, going out with guidance of the 15bp over area.

A Eu1bn deal was eventually priced at 14bp over on the back of over Eu1.6bn of orders, after around Eu600m of orders had come in on the basis of the high single-digits.

The transaction was Stadshypotek’s first euro benchmark covered bond in almost exactly a year, and Bengt Edholm, head of treasury at Svenska Handelsbanken, Stadshypotek’s parent, said that it was prompted by the observation early this week that the issuer might be able to print a deal in the high single-digits and thereby, for the first time, fund itself more cheaply in euros than in Swedish kronor.

The issuer followed up on this with investment banks as part of its regular conversations with them, added Edholm, and they advised Stadshypotek that it could print a deal without a new issue premium. With Stadshypotek euro covered bonds trading at around 7bp-8bp over in five years this pointed to a level of around 9bp over for a long five year, added Edholm.

“This was the advice we got from a range of banks, not just the leads,” he said. “Most of the banks advised us that we could print inside 10bp over.”

Indeed syndicate officials spoken to by The Covered Bond Report on Tuesday morning before the spread was widened had noted that the spread was tight but did not criticise it or say anything that foretold the eventual outcome.

However, when the issuer launched its deal on Tuesday there was competing supply, such as in the form of a new cédulas hipotecarias issue from CaixaBank, and this and other deals “took away the limelight from our very low risk offering”, said Edholm. Market participants also cited the risk-on mode of the market.

As a result of only moderate demand coming in the issuer had to make a decision as to how to proceed with the transaction.

“We could have decided to print a Eu500m deal,” said Edholm, “but we’ve never done that before and because we got the message that the problem was not our credit but the spread the decision was obvious. We decided to increase the spread and then the order books exploded in five minutes.”

Germany & Austria took 46%, Nordics 27%, Asia 8%, France 7%, the UK 4%, rest of Europe 5%, and rest of the world 3%. Banks were allocated 41%, asset and wealth managers 38%, central banks 10%, bank treasuries 6%, insurance companies and pension funds 3%, and retail 2%.

The eventual outcome was satisfactory, said Edholm, even though the initial spread was a mistake in being too tight.

“In the end the new issue premium is 4bp, which is what we have paid in the past, and the all-in euro funding cost is 7bp wide of domestic levels, which is also in line,” said Edholm. “The deal has also performed so we do not think the way it ended up will impede future transactions.

“It is a lesson, and it appears we were ill-advised and that the banks misread the market,” he added. “The consensus was that we could print inside 10bp over, but the conclusion we have drawn is that as long as the market is in risk-on mode as one of the safer credits you have to pay a new issue premium.”

Vincent Hoarau, head of financial institutions, covered bond and ABS syndicate at Crédit Agricole CIB, echoed this, saying that even though investors are cash rich, issuers would be well advised to be a bit more investor-friendly given that yields have fallen after the inconclusive Italian elections and given that spreads are now at historic lows.

“New issue premiums will have to rise in core markets and pricing power is still in investors’ hands,” he said. “Low beta names are likely to face some pressure in the short term and the pricing paradigm for the Nordics is now likely to change, with less ambitious pricing, although I do not expect anything dramatic and we have not witnessed any repricing in the secondary market.

“The right pricing approach and IPTs remain decisive. Demand for new issues is driven by the lack of supply, but investors are price sensitive and concerned by the spread situation in some jurisdictions, namely Germany and the Nordic countries, where spreads are tight in a global context of spread convergence.”

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