Norway

Excellent funding conditions drew more covered bond issuers from core Europe to the market this week, with impressive deals done at aggressive spread levels. But bankers cautioned that new issue premiums may have to rise with juicy spreads from peripheral Europe drawing investors’ gaze.

Terra BoligKreditt became the second Norwegian issuer to supply the market this year and the fifth overall to come with a 10 year or longer maturity. The long maturity, despite being more expensive than a five year, will build its curve and should attract new investors.

Norway’s Finance Ministry wants to limit the amount of assets banks can use for covered bond issuance, and could prevent those issuers from taking retail deposits, according to letters published on Wednesday. The ministry of Finance will also consider granting a banking license enabling banks to access central bank funding.

DNB Boligkreditt made a surprise return to the market on Wednesday, after half a year away, issuing a smaller than usual covered bond and taking advantage of the exceptionally strong funding conditions in the long end, where supply is scarce.

Sparebank 1 Boligkreditt printed only the second seven year dollar covered bond since 2007 on Wednesday, pricing 2bp inside where Stadshypotek brought the first in September but with a modest new issue premium. Separately, the issuer explained that its covered bond encumbrance was at the lower end of the Norwegian spectrum.

This week’s trades from Terra Boligkreditt and Landesbank Hessen-Thueringen (Helaba) performed well in the secondary market on Wednesday. However, the lower rated Norwegian deal shone brighter, paying testimony not only to the strength of the jurisdiction and collateral but also to Terra’s exceptional marketing effort.

Terra Boligkreditt has issued its first €1bn covered bond, following extensive marketing. Not surprisingly, given the paucity of euro denominated covered bond supply, there was plenty of demand from a wide range of investors across Europe.

Norway’s Terra Boligkreditt began a week long roadshow on Monday, ahead of what could be its first ever jumbo covered bond. But the prospect of a limit on Norwegian covered bond issuance should prompt questions from investors.

Covered bonds may have caused a growth in mortgage lending and an increase in house prices that now pose a threat to the stability of the Norwegian financial sector, the country’s financial regulator said on Tuesday. To address the risk from the rise of secured funding, Norway’s Financial Supervisory Authority is debating whether to follow other jurisdictions and impose limits on covered bond issuance.

Core covered bonds are performing poorly, with low coupons putting investors off, according to Deutsche Bank analysts. Higher yielding peripheral paper could benefit as a result, but the prospect for fresh benchmark trades from southern Europe remains uncertain.

Terra Boligkreditt has mandated for its third covered bond benchmark of 2012. Strong collateral growth and larger funding needs mean it could launch its first ever jumbo trade later this month, said syndicate leads.

With peripheral concern resurgent, covered bond investors are looking for safety. But having grown tired of exceptionally tight core levels they are also in search of spread. Nordic issuers are best placed to offer them both and should be taking advantage of the primary while they can, said syndicate bankers.