Sweden

Stadshypotek’s jumbo transaction this week offers several lessons for the market and provides a clear indication of investor sentiment, as well as potential pitfalls on strategy and spread that core issuers would do well to avoid.

Sweden’s Stadshypotek ended a long absence from the euro covered bond market on Tuesday morning, approaching investors with a single digit spread for a new 5.25 year deal. But competing supply from other issuers and asset classes with more attractive starting spreads slowed demand, and the borrower was forced to revise guidance sharply upwards.

SEB was tempted into a surprise return to the euro covered bond market by the best relative funding levels versus its domestic market for some time, its head of treasury management told The Cover on Tuesday. John-Arne Wang said SEB saw a chance to grab tighter funding on Monday, thanks to a three week drought in the euro primary market.

Bayerische Landesbank followed Stadshypotek on Wednesday morning by issuing a £200m sterling FRN, which provided it with slightly cheaper funding to euros — a market in which issuance has fallen to half of what it was at this point in 2012.

Stadshypotek’s inaugural sterling covered bond not only achieved great investor diversification, but also provided exceptionally cheap funding, sending a strong message to other foreign issuers who may be looking for something similar.

Sweden’s Stadshypotek gave the primary covered bond market a surprise injection of liquidity on Monday morning when it opened books for its first sterling deal. In contrast to many covered bond issuers, it has diversified across a wide range of currencies in the last two years so the addition of a sterling deal was a natural progression.

Sweden’s financial regulators are concerned at how much encumbrance is on banks’ balance sheets. The country’s borrowers are among the most encumbered in Europe, and despite efforts to increase deposits new covered legislation could make the situation worse.

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.

Stadshypotek pushed the dollar covered bond curve out to seven years this week, pricing the longest covered bond benchmark in the currency since 2007.

Sweden’s Stadshypotek priced a A$750m inaugural transaction on Friday, paying only a small premium over where it would have funded in the domestic market.

Sweden’s Stadshypotek on Thursday became only the fourth issuer to launch a benchmark Kangaroo covered bond. Despite an explosion of domestic supply this year the global appetite for Australian dollars remains strong, which bodes well for other Nordic issuers looking at inaugural trades.

Sampo Housing Loan Bank on Wednesday mandated for the sixth seven year covered bond benchmark of September, and should price the trade on Thursday. Despite a renewed appetite for risk in the wider market, covered bond supply remains consigned to safer names, but a successful auction for the Spanish sovereign could pave the way for further Cédulas.