Swedbank achieves tight level in Eu500m sub debt comeback

Swedbank took advantage of a buoyant subordinated debt market and strong demand for Nordic credits to sell its first Tier 2 transaction in four years yesterday (Wednesday), a Eu500m 10 year non-call five deal.

Leads Bank of America Merrill Lynch, Barclays, BNP Paribas, HSBC and Nordea priced the transaction at 215bp over mid-swaps, inside a 220bp-225bp range indicated when the books on the Eu500m no-grow deal were opened thanks to an order book of some Eu2bn comprising over 150 accounts.

Gregori Karamouzis, head of debt investor relations at Swedbank, said that in addition to favourable market conditions, greater clarity on the regulatory front was a factor in the issuer’s decision to go ahead with such a deal now.

“The EU has made encouraging progress and we will probably see the final CRD IV implementation coming in soon,” he said. “This would then mean that the grandfathering and the cut-off for old style instruments to be given credit in the capital structure of a bank is getting close.

“And then thirdly,” he added, “we have been calling existing tier one and tier two instruments on the first call date over the last year and a half, and we have also made some buybacks with investors that wanted to sell some of these securities, so in particular in this last quarter we’ve had some of our existing capital instruments falling off our books.”

The deal is the issuer’s first Tier 2 issue in four years and Karamouzis said that the issuer was able to take advantage of pent-up demand.

“We expected a very good reception and really got very good momentum going when we launched the transaction from investors that we know quite well, and also a few new investors in the book,” he said. “Throughout the year investors we have met with have been asking for when our next capital instrument issuance would come — we haven’t done one for many years — and so we felt there was a lot of interest out there. Having a Eu2bn book built relatively quickly is a testimony to that.

“The securities are also performing very well in the secondary market today,” he added. “We capped the size to Eu500m and of course that leaves a lot of interest out there as we couldn’t satisfy everyone in allocations.”

The deal was priced well inside where fellow Swedes Nordea and SEB priced similar deals earlier this year, with SEB, for example having issued a Eu750m 10 year non-call five issue at 310bp over mid-swaps in early September. A market participant also put the re-offer spread slightly inside the two other Swedish banks’ secondary curves.

Karamouzis described the level achieved as “very competitive” relative to some of Swedbank’s peers.

“That is a testimony to how credit investors really recognise the new risk profile of Swedbank compared with our peers and also in a European context,” he said.

Fund managers were allocated 65% of the issue, banks 18%, insurance companies and pension funds 14%, and corporates 3%. Germany/Austria, France, Sweden and the UK/Ireland took 14% each, the Benelux 11%, Denmark 11% , Finland 10%, Switzerland 3%, southern Europe 3%, Asia 1%, and others 5%.

Steve Sahara, managing director, global head of DCM solutions and hybrid capital at Crédit Agricole CIB, said that quality and scarcity were key to Swedbank’s success.

“The deal looks like it may be the lowest T2 new issue spread among euro Nordic T2 issues in 2012,” he said, “and only about 160bp back of where Swedbank’s five year senior deal was quoted. This reflects specific demand for the name and also the general sub/senior spread compression during the risk rally we have been seeing. Yield hungry investors are willing to go down the capital structure to buy subordinated bonds rather than senior.

“However, investors still take comfort from a strong issuer behind the riskier instrument. Investors also know old school-type T2 structures will become extinct soon, adding another dimension of scarcity in addition to the infrequency of issuance from this top credit.”