Swedbank rekindles euro covered in busy market

Swedbank restarted euro benchmark covered bond supply after two weeks without issuance on Wednesday, pricing its first such deal of the year in a busy week for the FIG market across asset classes, with other Nordic issuers variously tapping senior unsecured, subordinated debt, and floating rate covered bond markets.

A euro benchmark covered bond from a Swedish issuer after the country’s banks emerged from blackout had been expected for some time, and Swedbank delivered on these expectations by announcing the mandate for a deal on Tuesday afternoon.

By then the FIG market had already shown itself to be open to new issuance, although most of the new supply was senior unsecured debt, plus some bank capital trades. The former included well-received deals for BNP Paribas and Crédit Agricole in 10 years and for Norway’s SpareBank 1 SMN in five years, and the latter a Tier 2 transaction for Danske Bank. (See separate articles on SMN and Danske).

Swedbank’s deal, a Eu1bn seven year, was its first euro benchmark covered bond since April 2013. Swedish euro supply has been limited this year in general, with only two deals having been launched before Swedbank’s new issue.

Kimmy Samuelsson, head of long term funding at Swedbank, said that this week’s deal fulfils the issuer’s base plan to sell one euro benchmark covered bond in 2014, roughly earmarked for launch sometime in the first half of the year.

He said that the euro covered bond market has been stable and in good condition for some time, and that after it emerged from blackout the issuer eventually felt that the coast was clear to go ahead with a transaction, with rumours about covered bonds’ being set for Level 1 LCR treatment an additional spur.

“After our blackout we thought that we didn’t see any worrying signs in the market and then on Friday there were the rumours about the LCR treatment, which added a positive flavour to the market so we thought we needed to seize the opportunity,” said Samuelsson.

Leads Danske Bank, Natixis, RBS, Swedbank and UniCredit priced the transaction at 8bp over mid-swaps, the tight end of guidance of the 10bp over area, on the back of more than Eu2.2bn of orders.

The official marketing process started with initial price thoughts of the 12bp over area, which generated more than Eu1.7bn of orders.

At 8bp over, the deal is the tightest seven year non-German euro benchmark covered bond since 2007, according to a banker on the deal. Swedbank priced a Eu1bn seven year at 13bp over in April last year.

“Swedbank is very well funded, but had nonetheless been looking at the market for a while and wanted to do a deal that made a difference,” said the lead banker. “The optimal point of entry is difficult to choose, but the market looked buoyant this week and the result validates the decision to go ahead with a deal.”

A syndicate official away from the leads said Swedbank had obtained “a great result” with its deal.

“They got a very tight level,” he added.

Samuelsson said that pricing at 8bp over is at the upper end of the issuer’s expectations for the spread.

“We felt that 10bp over wouldn’t be a problem, and then as the deal progressed we expected it to go to 9bp and thought that 8bp was on the table if we got really good momentum,” he said.

Asked whether the strong imbalance between supply and demand would suggest that the initial spread on deals should be closer to where new issues end up being priced, Samuelsson said that it is difficult to get a handle on the details of investors’ price sensitivity, with market practice rules making it difficult to get concrete feedback from investors.

“Spreads are quite tight and a basis point means a lot, but when you start you don’t know where the price breaks are down to the last basis point,” he said.

“All we know is that if you start too tight and don’t get any traction it’s a disaster. But I think the price discovery process is mutual among issuers and investors.”

Nykredit Realkredit today announced a European roadshow starting on Tuesday for a potential euro dated subordinated Tier 2 CoCo transaction with a 7% CET1 trigger.