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Sweden floors dollars for supras

By bringing a dollar deal that offered a curve-adjusted reoffer spread of just a few basis points over US Treasuries, the Swedish debt management office has not only blown apart the minimum spread myth of Treasuries plus 10bp but also has shown how low a borrower can go against the dollar benchmark.

For the last few months, SSA bankers have been fretting about how the best names in the market can expect to print dollar deals at levels that offer any sort of attractive spread over Treasuries. Pushing out maturities has been one option, and Sweden on Monday did just that with a new longish three year that matures in December 2015.

But in spite of this concession, the $1bn Reg S/144A print didn't even manage to yield 0.05% more than the current three year US Treasury. On a curve adjusted basis, Sweden’s deal looked more like Treasuries plus 2.75bp.

Sweden's deal is probably the shape of things to come for top SSA names in dollars, but it showed that although those credits can achieve tight pricing, they must walk a tightrope to get there.

With the International Finance Corporation and the African Development Bank both said to be eyeing the dollar market for the near future, the Swedish deal laid down a marker that showed just how tight are the spreads that investors are willing to entertain from the top credits — despite many SSA bankers believing that a deal that came inside 10bp over US Treasuries would be a no-go.

The Swedish deal is the tightest reoffer level to US Treasuries since the UK brought a five year dollar deal in June 2003 at Treasuries plus 2bp. Of course, the market is very different now and the Swedish reoffer level is as much a function of tight swap spreads as it is a vote of confidence in the issuer’s ability to pay its debts. The UK deal was reoffered against Libor at less 35bp — five times tighter than Sweden’s Libor level.

Although some orders for Sweden dropped between guidance of mid-swaps less 5bp area to the final pricing level of less 7bp, the deal garnered over $1.6bn of interest at its peak.

That should give greater confidence to supranational issuers issuing in global rather than Reg S/144A format, especially as they will probably be offering bonds in five and seven years, where yields are wider. They should still be able to achieve a $2bn deal at sub-Libor levels but at least Sweden has indicated the level at which interest starts to waver.

The Swedish deal was exactly what this market needed — and what EuroWeek last Friday called for issuers to do. It is high time an issuer doing its last deal of the year with little to prove pushed on pricing. Too many deals have missed an opportunity to test investor appetite and taken the soft option to blend in with the mediocrity. Sweden has shown them what can be done. 

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