DNB stirs sterling market as Nordics stand ready

5 min read
EMEA

DNB Bank stirred the dormant sterling bank senior unsecured market with the first new issue in two months on Tuesday, landing its inaugural senior non-preferred note in the currency, a £750m five-year non-call four transaction.

The deal is the first new bank senior unsecured bond denominated in sterling since June 7, when Royal Bank of Canada and OP Corporate Bank both tapped the market.

Some bankers said it came as a surprise to see a sterling trade so early in August, having expected the primary market to remain idle for another week at least.

"It demonstrates that you can still get an inaugural asset class done in sterling even in the peak summer months, which tells you that the nuances of the senior non-preferred security are viewed as being extremely vanilla in the sterling market these days and that you don't necessarily need to worry about a high level of marketing for an individual credit," said a banker away from the leads. "They are in part piggy-backing off a decent volume of sterling senior unsecured supply by non-UK names, which has occurred a lot in recent years."

A banker at one of DNB's leads said feedback on the trade indicated that sterling investors are receptive to supply from highly rated, well-known names.

The deal, which is expected to be rated A3/A (Moody's/S&P), is DNB's first sterling-denominated senior non-preferred issuance. The Norwegian issuer is, however, well established in the currency, having sold a handful of sterling senior preferred notes in recent years, the last a £750m four-year non-call three transaction in March.

"It's becoming an increasingly technical market and it felt to us a reasonable opportunity for the buyside to pick up a name that is not the most frequent issuer at a decent spread, and the book updates we've put out reflect that," said the lead banker.

Leads Credit Suisse, HSBC and Nomura marketed the new issue with initial price thoughts of Gilts plus 225bp area. The spread was later set at 215bp with books above £700m.

"It went better than I expected," said a second banker away from the deal. "Fair value is somewhere in the 200bp area plus or minus 5bp, and a £700m book for this time of the year is a pretty decent result. It also looks relatively sensible versus where their euro pricing would land."

The leads went on to fix the size at £750m, with the book closing above £925m.

Bankers disagreed on the level of arbitrage achieved by DNB, with some arguing it had obtained a saving in the mid to high single digits versus the spread at which it could have priced in euros, while others argued the deal had priced roughly flat to slightly back of the single currency. Subjective views on curve adjustments and the premium that would be required in the euro market – which is effectively closed regardless – were the reasons for the differing views.

The deal's inaugural nature meant that interpretations of the premium paid by DNB also diverged.

Extrapolating from DNB's sterling senior preferred curve, as well as sterling senior non-preferreds from other Nordic issuers, bankers variously calculated that the new issue's fair value was either in low to mid-190s or in the high 190s.

While the US dollar market has proven its availability in recent weeks, European issuers have had to pay up significantly versus their home currencies in order to print in size – hence DNB's selection of sterling.

"If you're a non-frequent issuer, why on earth would you want to be paying up? We've seen the bigger funders looking at the European market with low conviction on the volumes there, so they are effectively saying with their actions that they're prioritising strategic access to the US dollar market," said the lead banker. "But that's not for everyone."

Nordic issuers are usually among the first to emerge from their summer blackout periods.

Bankers anticipate that further senior supply will emerge from the region over the coming weeks, as many issuers still have a decent amount of MREL-eligible debt to raise under their 2022 issuance plans.

"The Nordics are back and would stand ready, so to speak, but the rest of Europe is still on vacation," said a third banker away from DNB's deal. "It will remain fairly quiet for now with one or two trades here and there."

DNB said while reporting its second-half results that its expected future MREL requirement leads to an estimate for around €15bn-equivalent of MREL eligible debt. The bank noted that, following the implementation of the so-called subordination cap in Norway, its target can be met with around €8bn of SNP and around €7bn of senior preferred bonds.

The bank has now issued around €4.79bn-equivalent of SNP in 2022.