Svenska Handelsbanken capitalised on deep demand for outperforming subordinated debt as it garnered a "remarkable" £2bn of orders for a £500m 10-year non-call five Tier 2 on Monday.
European banks' bond issuance is set to pick up this week as issuers return from holidays and blackouts and seek an early mover advantage ahead of what is expected to be a busy and frequently disrupted window. While public holidays across much of the continent kept the euro market shuttered on Monday, Svenska Handelsbanken beat the queue by making a rare visit to sterling.
The deal is the Swedish bank's first sterling-denominated Tier 2 and its first issuance of any format in the currency since April 2019, when it sold a £300m December 2023 senior transaction.
The new issue was marketed with initial price thoughts of Gilts plus 305bp area, via leads Citigroup, Credit Suisse, Goldman Sachs, HSBC, Svenska Handelsbanken.
With demand in excess of £1.8bn, the spread was set at 280bp for a maximum size of £500m. The size was subsequently set at £500m with the book closing above £2bn (pre-rec).
"That is a remarkable book and a relatively punchy price," said a syndicate banker away from the deal.
Bankers' perspectives on the price varied slightly, owing to the deal's inaugural nature. Svenska trades inside most of its European bank peers in euros but bankers disagreed on the extent to which that differential should be transposed into the sterling market.
Comparables such as Nordea's £500m 1.625% September 2032 non-call 2027 Tier 2, which was bid at 265bp on Monday, according to Tradeweb, and Credit Agricole's £500m 1.874% December 2031 non-call 2026 Tier 2, bid at 280bp, led them to conclude fair value was in the range of the low 260s to 270bp.
A banker at one of the leads said the deal, which is expected to be rated A3/A–/A+, "ticked a lot of boxes" for investors in a market that had improved in the wake of last week's consumer price index figures.
"We've definitely outperformed in higher beta and we've had a reasonable amount of sub cash come back from tender offers in various currencies, so the backdrop felt very conducive," he said.
"It was a quiet market and there is a first-mover advantage, whilst obviously for investors this is a rare, high-quality name and a Single A rated Tier 2, so there's no problem in terms of credit work or credit concerns. It's a platinum name and I think the smart money recognised it's a rare opportunity to buy the name in this format, and the speed of the bookbuild reflected that."
The deal also followed a £750m senior non-preferred from Norway's DNB Bank, which pointed to strong sterling demand as it pulled in more than £925m of orders last Tuesday.
"They have the added benefit that DNB went out last week and validated sterling levels and demand," said a DCM banker away from the deal. "You could argue that execution certainty is better in sterling than euros at the moment given the lack of supply there."
There has been no bank capital supply in euros since June 29, when Italian lender Credito Emiliano sold a €200m social Tier 2.
Bankers calculated that the final spread of 280bp over Gilts was roughly equivalent to, if not slightly inside, the level Svenska could have achieved with an equivalent euro transaction, when considering the premium that would likely be required to reopen the euro market.
They noted, however, that the comparison was somewhat academic, given the issuer printed a €500m 11-year non-call 6 Tier 2 less than three months ago and would be unlikely to return for a 10-year non-call five transaction so soon afterwards, while the euro market was also effectively closed on Monday regardless.
The deal is only the second sterling-denominated Tier 2 transaction of the year so far, following a £200m insurance Tier 2 from life and pensions consolidator Chesnara in February.
In contrast, banks and insurers sold £7.25bn of Tier 2 capital in the currency in 2021.
Bankers attributed the sharp fall in issuance to the fact that the sterling Tier 2 pricing levels indicated by secondary markets have rarely been compelling over the course of the year. They also noted issuers have generally had a lower need for Tier 2 this year.
"One would assume this result will bring a few more issuers out of the woodwork, but it was not expected to be a huge year for Tier 2 anyway," said the syndicate banker away from the deal.