Home is where the heart is
If anywhere in Europe has a chance of bringing transactions to the market and successfully selling them in this period of uncertainty, it’s the Nordic region. Always one of the most reliable covered bond markets, it looks especially well placed, having come through the European sovereign debt crisis relatively unscathed. Savita Iyer reports.
The Nordic region learned its lesson well after its own crisis nearly two decades ago. “Nordic issuers managed the Scandinavian market crises of the early 1990s and took their conclusions for future challenges,” said Monika Rast, head of origination/international financial institutions at UniCredit in Munich. The experience has given them a very conservative outlook. “Nordic issuers offer high quality of cover pools with low LTVs and well seasoned loans, have high transparency standards and investors appreciate that,” Rast added.
The region is well placed as the covered bond market starts to pick up again. Investors consider Nordic issuers to be of the same caliber as issuers from jurisdictions like France and Germany. German investors have been big buyers of Nordic covered bonds in the Eurobond market, Rast said. Nordic issues also started coming to the market with great success after the European Central Bank launched a program to purchase €60bn of covered bonds to support the covered bond market in the wake of the financial crisis. Being non-Eurozone members (Finland is the exception), Nordic countries did not directly benefit. Indirectly, however, they benefited from the overall spread tightening following the ECB announcement.
Issuers from Norway, Sweden and Denmark issued in the euro covered bond market in both 2009 and 2010, in both longer-term debt and extending maturities. A number of Nordic issuers came with seven-year and longer covered bonds earlier in 2010, which were very well received by the market, said Ola Littorin, first vice president and head of long term funding at Nordea in Stockholm. For Swedish issuers, these longer, international market transactions complement the maturities of the domestic market, where five-year maturities are the norm.
But while the international covered bond market serves as an important diversification for Nordic issuers, allowing them to price longer dated bonds in benchmark sizes, pricing can be an issue. During most of 2009 the international market proved a more expensive funding alternative than the Swedish domestic market, Littorin said. Nordea Hypotek, for example, was absent from the international market last year, focusing instead on domestic issuance where it found strong demand for its bonds.
Towards the end of the year, the price differential between the international market and the domestic market in Sweden had decreased, reaching near-parity by early 2010. This prompted some further issuance by Nordic issuers: Nordea did a seven-year Eurobond in early January, priced at mid-swaps plus 39, quite close to the going rate in the domestic market at the time.
More recent European market problems have made issuing internationally difficult. Nordic issuers have instead focused on local market issuance – a trend that is not unusual in turbulent times. Domestic investors from the Nordic countries have participated quite actively in Eurobond issues, and “when there is general global uncertainty, it is very valuable to have that domestic bid in our domestic bonds as it provides support and stability with respect to pricing”, said Littorin.
The region’s domestic covered bond markets have always been far more important as a source of funding for issuers than the international capital markets. Covered bonds are deeply entrenched in the financial systems of each country, and they are supported by such factors as rigorous underwriting criteria, a high degree of transparency with respect to the creditworthiness of the borrowers and a well-established covered bond specific legal framework.
Local governments in the Nordic region have also made it their priority to continue supporting and developing the domestic covered bond markets. Norwegian issuers did not have to tap the Eurobond market in 2009 because the government of Norway offered a very favorable swap scheme to all Norwegian covered bond banks, said Rast. This enabled them to exchange covered bonds for T –bills – a preferable arrangement to issuing Eurobonds.
Domestic investors are likely to remain active in Nordic names, even if the larger European debt crisis continues, predicted Littorin. The domestic covered bond markets are strong, supported by relatively low supply of government debt and with a very long track record. Investors globally have expressed concerns about the credit quality of covered pools, and the outlook for sovereign debt levels in general. But given the strong credit position of Nordic economies and covered bond issuers, investors will probably remain active in Nordic covered bond issues, despite market turbulence, Littorin added.
On average, Germans have bought up on average about 50% of every Nordic euro denominated issue. Arrangers who bring Nordic issues will be relying on this support going forward.