Terra to hit the road, debut jumbo an option but no ‘must’

Oct 12th, 2012

Norway’s Terra BoligKreditt announced a mandate for a new euro covered bond benchmark on Monday that, subject to market conditions, will follow a pan-European roadshow starting 22 October and could be the issuer’s first jumbo sized deal.

BNP Paribas, Commerzbank, Natixis, and UniCredit have the mandate for the transaction, with a lead syndicate official noting that it had been some time since the issuer had gone on an extensive roadshow. A deal may follow, but this will depend in part on market conditions following the investor meetings.

The last time Terra tapped the euro benchmark covered bond market was in the middle of June, when it sold a Eu650m seven year issue at 55bp over mid-swaps. That was said to be trading at around 43bp over mid. The deal is the issuer’s largest euro benchmark to date, although the issuer has since then communicated that it will be able to issue Eu1bn jumbos from next year due to an increase in its capacity.

Kristian Fiskerstrand, vice president, funding at Terra BoligKreditt, told Nordic FIs & Covered that the issuer’s next transaction could be of jumbo size, with the issuer having previously signalled that it expected to be in a position to issue larger transactions in 2013.

“The loan growth has been somewhat stronger than expected, although not that far away from our estimates,” he said, “so in accordance with our internal risk and ALM policies we have now reached a point where we can issue larger transactions.”

The issuer already departed from a Eu500m “no-grow” strategy when it sold its last covered bond benchmark, he added.

“For the upcoming transaction, our policies allow us to issue a jumbo size deal, but there is no requirement for us to do so,” he said. “We will make a decision on whether it is beneficial for us to increase the size further from a business perspective based on the feedback we get from the roadshow and the market developments ahead of a future point of execution.”

Terra BoligKreditt is one of several issuers to have had its collateral score increased — reflecting higher expected cover pool losses — as a result of updates to Moody’s rating methodology announced in June. In these the rating agency introduced what are effectively floors on the collateral scores that can be achieved in each market.

Analysts have noted that the changes worsen the collateral scores of issuers across various markets without the composition or quality of the underlying cover pool having changed.

Terra has been cited as one of the worst victims of the change given that it had hitherto consistently achieved one of the best collateral scores of any covered bond programme Moody’s rates, and because the increase in its collateral score — from 2.1% to a 5% level set for Norway — is among the highest. Although the rating agency will continue to report the cover pool-specific score, this will be overridden by the country floor.

In a paper published last month Terra said that this meant that Moody’s changes had increased the minimum overcollateralisation level necessary to maintain the Aa2 rating of its covered bonds from 3% to 5% — although the higher level is consistent with the minimum OC required under Terra’s programme and therefore does not require an increase in overcollateralisation.

“Therefore it is important to note that Terra BoligKreditt’s cover pool remains to be of very high quality and the increase in Moody’s collateral score and cover pool losses is related to the recent change in Moody’s methodology,” said the issuer.

Meanwhile, away from covered bonds, Terra’s country peer SpareBank 1 SMN is understood to have mandated Barclays, Citi and HSBC for update meetings with investors in connection with a possible senior unsecured deal.

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