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Saturday, 18 November 2017

Pfandbriefe/Covered Bonds 2005 - Finishing touch

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The jumbo family continues to grow as more issuers seek to reap the benefits of putting assets to work in an efficient manner that offers the liquidity that investors crave. The Nordic region has so far been notable by its absence, although this is about to change, as Philip Wright reports.

Sampo Bank, Finland's third largest with total assets of around €19bn, is preparing a transaction that will see it become not only the first Finnish entrant into the sector but also the first from the entire Nordic region.

"We have a substantial share [14%] of a growing mortgage market that is in very good shape at the moment," says Lauri Iloniemi, head of asset and liability management at Sampo Bank and a board member of its mortgage bank. "Prices are rising but we are not building up a bubble."

The consequent demand for mortgages offers Sampo another source of funding via the covered bond route to complement its traditional reliance on customer deposits. It claims a 13% share of this market, which in turn accounts for over 50% of its funding at present.

This is a proportion Sampo is looking to decrease, an action that "creates a need for additional funding sources," according to Iloniemi, and with the state having recently reduced its historically strong holding in the bank to below 15%, utilising what he terms the "idle assets" provide an obvious and cost-effective option.

Its mortgage affiliate, Sampo Housing Loan Bank, came into existence in mid April this year with the re-branding of the Housing Loan Bank of Finland, and is destined to become the issuing entity for the new paper.

Although it will not be the first Finnish institution to venture into the international covered bond market, it will be by far the largest. Aktia Real Estate Mortgage Bank has already trodden this path twice, with a 10-year fixed in April this year and a seven-year FRN in June 2004. Both were €250m transactions, although their consequent lack of liquidity did not prevent them from attracting a significant level of oversubscription.

Sampo's approach will be somewhat different, however, with liquidity being high on Iloniemi's list of priorities. Although only Dresdner Kleinwort Wasserstein has so far been appointed in a bookrunning capacity, more banks will feature on the top line of the forthcoming issue to maximise the market making capacity, with the expected size of €1bn also enhancing its liquidity prospects.

As a curtain raiser for what Sampo hopes will be a lengthy performance, every effort will be made to accommodate investors' needs, and the underlying market backdrop taken into consideration.

"We are very sensitive to the needs of the market," maintained Iloniemi. While stating a preference for a five-year maturity for the inaugural transaction, he stresses that nothing is cast in stone and that the bank would be willing to contemplate a change of plan if the situation so required it – mainly with one eye on the future. "This will not be a one-off. We intend to issue every year from now on."

Despite the relative lack of issuance from the country in the covered sector in general and the jumbo space in particular, Finland has actually had legislation in place since the beginning of 2000. Although it was developed at a similar time to the Irish law and based largely on a German template, there were perceived weaknesses and it has taken a number of amendments to satisfy issuers and investors alike.

Being similar in many respects to other legislations, the Finnish Act will throw up no great surprises in terms of format. The only additional aspects in Sampo's case will be voluntary structural enhancements over and above the legal requirements (normally taken to mean over-collateralisation) aimed at securing credit advantages in the eyes of the ratings agencies. Iloniemi is hopeful of earning Triple A ratings for the debut transaction (it is rated A1/A– at the senior level), so some kind of adjuncts be expected.

Deriving from a number of existing laws, the Finnish version meets the requirements of the UCITS directive, and with a 60% maximum LTV is already far more conservative than the 80% allowed under that legislation – before Sampo starts adding any features of its own, such as its stated intention to use 100% of residential mortgages as opposed to the 90% minimum required.

Although launch is anticipated this year, it is not imminent. "It will not happen before or during the summer," says Iloniemi. Autumn therefore looks set to be the time.

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