Swedbank in EUR1.5bn ‘blowout’ covered bond at low NIP, SEB follows

Swedbank attracted the most demand of any euro benchmark covered bond this year on Wednesday, pricing a EUR1.25bn five year issue at only a modest new issue premium (NIP), and SEB yesterday (Thursday) built upon the template to issue a EUR1.5bn five year at the same level.

Impressive levels of demand for a EUR1.5bn seven year cédulas for CaixaBank on Monday and a EUR1bn seven year OH for BPCE on Tuesday convinced bankers that the covered bond market had reached a turning point this week after more modest sessions, with investors returning after widening spreads had boosted covered bonds’ relative value and with other asset classes struggling.

However, syndicate officials said each of the deals proceeding Swedbank’s had offered elevated new issue premiums.

“We had a theme this week, which was that even though demand was increasing, good-sized deals could only be done at a price, with premiums on the rise,” said a syndicate official away from Swedbank’s leads on Wednesday. “Swedbank today has blown that theory out of the water.

“We thought it might struggle when we saw the initial price, but it’s a real blowout.”

Swedbank Hypotek leads BNP Paribas, Danske, LBBW, NordLB, Swedbank and UniCredit launched the five year issue with guidance of the 18bp over mid-swaps area, before revising guidance to 15bp plus or minus 1bp on the back of books “well above” EUR2bn. The price was then fixed at 14bp and the size at EUR1.25bn (SEK11.7bn), with the book closing at EUR2.9bn, pre-reconciliation.

The book is the largest of any euro covered bond issue so far this year, surpassing EUR2.4bn of orders taken by BPCE on Tuesday.

“With an order book of EUR2.8bn and 130 orders it clearly exceeded our expectations, said Ulf Jakobsson, head of funding at Swedbank. “It indicates that some investors are interested in moving away from ECB-influenced books.”

A syndicate official at one of the leads said the deal benefitted from increasing investor participation in covered bonds, noting that demand for new issues had been increasing since the end of January, with real money accounts in particular returning to the market.

“This week feels like a turning point,” said the lead syndicate official. “We have many more investors looking at covered bonds now than earlier in the year – that is what is new – and it felt like Swedbank is exactly the name they wanted to see.

“This shows that if you come to the market with a really strong name and a AAA product that everyone can buy with a two digit spread over swaps, investors are very welcoming.”

Banks bought 54% of the deal, fund managers 19%, central banks and official institutions 17%, and insurance companies and pension funds 10%. Accounts from Germany and Austria were allocated 60%, the Nordics 11%, the Benelux 8%, Asia 6%, the UK and Ireland 6%, France 3%, and others 6%.

Some syndicate officials at and away from the leads said fair value for the new issue was 11bp, seeing Swedbank March 2022s at 12bp, mid, May 2021s at 10bp, and September 2020s at 9bp. Other syndicate officials away from the deal said the concession was more limited, citing Swedbank September 2020s at 13bp, bid, and May 2021s at 12bp.

“That meant they started with a premium of 5bp or 6bp – which is the kind of premium most deals have been finishing with,” said one.

Jakobsson said the deal came “a handful of basis points” inside where an equivalent Swedish krona issue would have been priced.

Before Swedbank’s new issue, syndicate officials had noted that recent deals suggest that investor demand is shifting further out the curve, after being focused in the five year part of the curve in January. They said this was because of falling yields, with the five year swap rate at 6bp on Wednesday, down from 33bp at the start of the year.

“This shows it is the spread that counts, not the falling absolute yield,” said the lead syndicate official.

Jakobsson said Swedbank chose the five year maturity at it fit the bank’s funding needs.

“We did consider both a five year and a seven year transaction, but in the end decided to go for a five year that fits well into our outstanding curve,” he said.

Jakobsson said Swedbank had intended to launch a deal shortly after exiting its blackout period.

“The plan was to enter the market soon after the release of our results on Tuesday,” he said. “We were encouraged by the result of the SCBC transaction last week, as well as the BPCE transaction that came on Tuesday.”

Jakobsson added that Swedbank will most likely be less active in the market during 2016 than in 2015, due to lower funding needs. He noted that last year Swedbank had printed SEK225bn in long term funding and would this year aim to print around SEK175bn.

SEB AB followed on Thursday, with leads Crédit Agricole, Deutsche, ING, SEB, UBS and UniCredit launching the five year Swedish covered bond with guidance of the 18bp over mid-swaps area, before moving to guidance of 15bp plus or minus 1bp on the back of books over EUR2bn. The deal was then re-offered at 14bp and the size set at EUR1.5bn.

The new issue is SEB’s joint largest covered bond, alongside a Eu1.5bn three year issue printed in 2008.

“The result overall is a very positive one,” said John Arne Wang, head of treasury management at SEB. “If you go back just a few days, the market indicated more to the high teens for a five year transaction.

“Given we now managed to get positive momentum and price a bit more at the tight end of what we thought was the possible range, it is definitely a good outcome.”

Banks bought 50% of the deal, fund managers 19%, insurance companies and pension funds 15%, central banks and official institutions 13%, and others 3%. Accounts from Germany and Austria were allocated 46%, the Nordics 20%, the Benelux 9%, the UK 7%, Asia 5%, France 5%, and others 5%.

SEB exited its silent period on Thursday, and Wang said the issuer had been keen to move as quickly as possible having observed the improvement in the covered bond market this week.

“We normally might be a little slower getting out of the starting blocks following results,” he said. “But after the market showed positive signs over the last few days, it was apparent to us that this week would work well.”

Wang added that he felt opportunities for issuance will be more limited next week, when some German areas will mark the traditional Carnival holiday.

“Our transaction today – along with Swedbank’s transaction and the other transactions this week that have worked well – should be a positive signal for the covered bond market,” he added. “Clearly, investors are returning to the market because relative value has improved.

“There has been a lot of negative comments about secondary liquidity, which is admittedly not great, and the functioning of the market, but today I felt surprised to the positive side, and that gives me reason to be more hopeful going forward.”

Syndicate officials away from the leads noted the deal followed the same pricing steps as Swedbank’s new issue, although the issuer opted to take a larger size.

“It is a bit of a copy-and-paste trade, but there’s obviously no shame in that when you’re piggybacking on a deal as emphatic as Swedbank’s,” said one. “This is another very impressive trade.”

The syndicate officials said fair value for the new issue was around 11bp, seeing 2021 paper from SEB trading at around 10bp, bid. They noted that SEB and Swedbank tend to trade in line.

Wang added that euro funding levels currently compare favourably to those available in the domestic market.

“It is not significantly cheaper, we are talking marginally cheaper, but there is also somewhat lower execution risk at the moment,” he said. “The domestic market is functioning, but it is not functioning as it has in the past, partly thanks to the impact of negative interest rates.”

Wang said SEB might issue one more euro benchmark covered bond “much later” this year, depending on developments in the domestic market.

“With today’s transaction we are well on the way with our mortgage cover pool financing, having already financed approximately one third of all our maturities this year,” he said.

Syndicate officials said the strong demand for new issues this week, with a Crédit Mutuel CIC EUR1.5bn long six year on Thursday also seen as a success and with EUR8.25bn of euro benchmark supply having hit the market, suggests that more sizeable deals can be done should conditions remain supportive.

“Overall, the picture is encouraging,” said one syndicate official. “These sessions have been much better than any we have had thus far in 2016.”