Terra’s jumbo strategy pays off as investor numbers swell

Terra BoligKreditt launched its first jumbo covered bond on Tuesday, a Eu1bn five year deal that Terra’s CEO said involved 50%-60% more investors than in previous, smaller transactions.

“We are quite satisfied with our first jumbo, seeing that we had an order book two-and-a-half times the size of the deal,” Kjartan Bremnes, chief executive officer at Terra BoligKreditt, told The Covered Bond Report.

Some Eu2.5bn of orders were placed for the benchmark and around 130 accounts participated in the deal. This was the result of Terra targeting new countries during a roadshow that preceded the transaction and the jumbo size allowing some investors for whom previous Terra deals were not large enough to get involved, said Bremnes.

“It was important to start working with new investors given that we wanted to size up with this deal,” he said. “On the roadshow we visited France and the Benelux, and in both countries we got new investors.”

Leads BNP Paribas, Commerzbank, Natixis and UniCredit priced the deal at 35bp over mid-swaps, 5bp tighter than initial guidance of the 40bp over area, which was subsequently revised to the 37bp over area and then 35bp-37bp over.

“The same pricing outcome would have certainly been reached starting with a tighter approach, but a 5bp premium on first price guidance looked to be the right number to gain good bookbuilding traction amid a directionless broader market backdrop, and most importantly outlined a bias towards size,” said Viet Le, FIs, covered bonds and ABS syndicate manager at Crédit Agricole CIB. “This was an excellent approach and pricing strategy, ensuring the best possible result for this trade and paving the ground for further successful issuance in jumbo format.”

At 35bp over mid-swaps, Terra’s deal was seen as having come without any discernible new issue premium, which Bremnes said was positive.

The deal is Terra’s tightest ever five year benchmark, according to a lead syndicate banker. Some bankers away from the transaction noted that the spread was attractive versus Terra’s Norwegian peers, with one questioning the differential over DNB Boligkreditt after a much smaller differential when Terra sold a Eu650m seven year in June. Bremnes said it is difficult to compare the pricing on its deal with levels for its peers.

“It is hard to know the actual pricing of peers because it has been some months since they were active in the euro market,” he said.

A syndicate banker away from the leads said that Terra’s deal showed that there is very strong demand for Aa2 rated covered bonds even from smaller issuers, and that this wasn’t always the case.

Terra’s Bremnes noted that non-triple-A ratings have become more common in covered bonds over the past few years, but that Terra’s issuance was well received even when triple-A ratings were more dominant.

“This is due to the combination of being a Norwegian issuer, having a stable Aa2 covered bond rating, and consistently featuring in the top 10 for the best Moody’s collateral scores,” he said. “We were the top issuer in terms of collateral score in Moody’s most recent quarterly report and in our experience that is quite important.”

Terra’s deal came not long after the Norwegian financial supervisory authority announced that it is considering capping covered bond issuance or imposing capital charges on issuers, but Bremnes said that there was not much investor-driven discussion about this during the roadshow, with the issuer instead typically raising the matter to provide some explanation.

“We said that Terra stands out because only a small portion of the group’s savings banks’ retail mortgages have been transferred,” said Bremnes, “and because we cap the loan-to-value at 60% as opposed to the legal maximum of 75%.

“We explained that we don’t see the FSA’s plans as having an impact on the business concept of Terra.”

The issuer expects to have a covered bond fundraising need of around Eu2bn-Eu2.5bn per year going forward, according to Bremnes, and to be a frequent issuer in the euro benchmark market via jumbos, as well as issuing domestically and selling registered covered bonds.

Germany and Austria took 55%, the Nordics 14%, Asia 9%, Switzerland 8%, the UK 7%, France 3%, the Benelux 2%, and others 2%. Funds were allocated 48%, banks 38%, central banks 10%, corporates 2%, and insurance companies 2%.