The past year has been a period of volatility and repricing, market-moving tweets and pulled deals, requiring issuers to be calculated yet nimble. This applied even to covered bonds, often labelled banks’ “rainy day” product. No covered bond navigated this environment better than Nordea Mortgage Bank’s record-setting €2bn dual-tranche, five and 15-year deal in February.
“[2017] was very benign, very rosy, it was very easy to be an issuer,” said Ola Littorin, head of long-term funding at Nordea Bank. “But [2018] was more volatile, and we expected that.”
The deal was brought into a market that, after heavy January supply, had struggled with broader volatility and increased investor selectiveness. It was not an obvious window and not an obvious trade.
Leads Barclays, Credit Suisse, Deutsche Bank, Natixis and Nordea priced the €1.25bn five-year tranche at 11bp through swaps, tightened from guidance of minus 8bp area, with books closing at over €2bn.
The €750m 15-year tranche was priced at 1bp through swaps, inside guidance of plus 2bp area, with books over €1.4bn.
The five-year tranche is the tightest non-German euro benchmark covered bond of the year, while the 15-year is the tightest ever benchmark covered in that part of the curve – and the only one to be priced in negative territory. As spreads widen, these records are unlikely to be challenged any time soon.
The deal’s success was attributed in part to a change of strategy. Nordea offered slightly higher premia than was the norm in the market at the time. It set a more consensual pricing template that other issuers would follow.
Taking advantage of a window with unusually high underlying swap rates, the issuer was also able to offer investors relatively high coupons, of 0.25% and 1.375%, while securing those record-setting funding levels for itself in spread terms.
The dual-tranche approach allowed Nordea to reap bank treasury demand with the five-year and yield-seeking insurers and asset managers with the 15-year.
The deal was the first benchmark covered bond from Nordea’s Finnish arm since January 2017. Nordea does not tend to do such large deals, but it wanted to take maximum advantage of the opportunity it had spotted, said Littorin.
It was timed to avoid the January rush and still get out ahead of expected widening in covered bond spreads later in the year as the ECB reduced covered bond purchases. It was also done well ahead of Nordea’s headline-grabbing re-domiciliation from Sweden to Finland, which was completed on October 1.
Petra Mellor, chief treasury manager at Nordea Bank, said that to succeed in 2018, issuers had to be timely.
“Windows shut as quickly as they opened,” she said. “You had to go on a day-by-day basis.”
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