Monday, 24 September 2018

Pfandbriefe/Covered Bonds 2007: Scandinavian hat-trick

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The arrival of Norwegian and Danish covered bond laws will round off the Scandinavian market. While their advent has been a long time coming, an efficient Sweden has already exceeded expectations in its short existence on the international covered bond stage. Rachelle Horn reports.

One of the never-ending talking points in covered bonds is the emergence of new markets. In the grand scheme of things, Turkey's contribution to covered bonds is expected to be minimal, the US has yet to live up to its hype and Italy's volumes, though noteworthy, will fall well short of those of Spain. But what cannot be overlooked is the potential from Scandinavia. With Sweden already successfully issuing covered bonds, the long awaited Norwegian law now ironed out and Denmark’s updated covered bond law waiting in the wings, Scandinavia is soon to have a full house.

Analysts are expecting the inaugural covered bonds from Norway any time now, and with the first plans emerging as far back as 2000, the Norwegian banking industry has had to endure years of waiting. The legal framework was first put in place in December 2002, and in June 2004 the Norwegian Parliament passed amendments to the Financial Institutions Act allowing domestic institutions to issue covered bonds.

The following year, changes to the Act to allow for the inclusion of derivative contracts in the cover pool were passed and the subsequent identified flaws, including the issue of transferring mortgages, has now been resolved. The final draft was submitted for consultation in March and is expected to be finalised any day now.

This is good news for DnB NOR, which, as the market leader in Norway and an internationally recognized institution, has long been pegged to issue the first Norwegian covered bond. Indeed, the long-standing member of the covered bond pipeline was previously expected to be able to issue a covered bond by the end of the first quarter and, despite being beset by the long delays in the new covered bond law, Thor Tellefsen, first vice-president of investor relations and long-term funding at DnB NOR confirmed that he is confident the bank will come to the market before the summer.

"We will conduct a non-deal related roadshow in Asia this month and a pan-European roadshow will likely take place in May or early June," he said.

On an annual basis, DnB NOR expects to raise between €4bn and €6bn through its covered bond programme, with two or three benchmarks in five, seven and 10-year maturities. So far, the borrower has only announced Barclays Capital as a bookrunner, though Tellefsen confirmed that two other houses have been tacitly mandated.

Analysts at HSBC, meanwhile, estimate the market potential for Norwegian covered bonds to be at €40bn–€50bn equivalent over the next seven years, with euros and kroner to emerge in equal measure. While only special credit institutions (Kredittforetaks), of which there are 12, are allowed to issue, HSBC predicts that Norway could become the ninth-largest covered bond market in Europe. Covered bonds collateralised by mortgages are likely to kick-start the market, but analysts expect that there will be the possibility of public sector assets in the long term. However, despite the attention commanded by the jurisdiction, HSBC suggests that Norway is unlikely to attain the market share of Sweden or Denmark.

The concluding chapter to the Scandinavian story is Denmark, which is now in its closing stages with the law expected to come into force by July 1 2007. Proposals to reform the Danish mortgage act were released last December to bring it more inline with its European peers. Previously, Danish covered bonds in the form of Realkreditobligationer (RO) were covered by the Danish mortgage credit legislation, however, "adjustments have become necessary to maintain a preferential risk weighting of Danish covered bonds, which in their current form do not satisfy all the details of the CRD requirements”, explains Annegret Hasler, a research analyst at Dresdner Kleinwort.

The reform of the legislation now implements EU requirements that are CRD compatible as well as fundamental changes, such as the abolition of the special banking principle. As such, a new type of Danish covered bond will be introduced, namely, Saerligt Daekkede Obligationer, SO, in addition to the CRD compatible RO version Saerligt Daekkede Realkreditobligationer, (SRO).

Sweden, meanwhile, has exceeded all expectations in the jumbo euro market since bursting onto the scene in October 2006. The jurisdiction is unique in having two covered bond markets, a large domestic Bostads Obligationer market and a new internationalised Saekerstaelda Obligationer.

Since its inception, some €9bn Saekerstaelda Obligationer has been launched by three issuers, NordeaHypotek, which has issued €2.5bn of jumbos, SBAB/SCBC with €3bn and Stadshypotek with €3.5bn. Soon to join this list is the last big player from Sweden, namely SEB.

"The Kingdom of Sweden has been running healthy budget surpluses and has been using some of the proceeds to reduce government debt,” says Ted Lord, head of covered bonds at Barclays Capital. “As such, its outstandings have contracted over the past couple of years and investors have been looking for alternatives. Swedish covered bonds offer a compelling yield pick-up over Kingdom of Sweden debt."

While there is still a pick-up to be earned compared with the established markets of Germany and France, analysts at UniCredit suggest that the reason appears to be a liquidity or an availability issue rather than a question of qualitative nature. Swedish issuers injected €9bn in Q3 2006, a time of year when books are usually cleaned up. Hence, it seems that the Street tends to be long in these bonds – a situation contrary to, for example, Pfandbriefe.

Indeed, the strength of the Swedish legislation has meant that it has been likened by some market participants to the law governing the German Pfandbrief market, which trades at levels tighter than any other jumbo covered asset class.

"The Pfandbrief market would be our goal, given the strength of the Swedish legislation, the strong local economy and the sound situation in the Swedish mortgage market," maintains Per-Ake Nyberg, treasurer of SBAB. Ola Littorin, first vice president and head of long-term funding at Nordea, agrees, noting that "we would expect investors to make that connection between the Swedish and German markets”.

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