Terra BoligKreditt sold a Eu500m (Nkr3.8bn) no-grow five year issue yesterday (Wednesday), taking advantage of an improved cross-currency basis swap that an official at the issuer said enabled it to prefund a forthcoming redemption and put in an appearance in euros at reasonable levels.

Leads Commerzbank, Nordea, UBS and UniCredit priced the deal at 73bp over mid-swaps, following guidance of 75bp over that was refined to 73bp-75bp.

The issuer put the transaction on hold last year after a roadshow in September, because of an unfavourable difference between levels available in the euro and Norwegian krone markets, partly due to a costly cross-currency basis swap.

Kristian Fiskerstrand, funding and risk management at Terra BoligKreditt, said that when the issuer first looked at the euro market after its roadshow it had been tapping the krone market for a cost 20bp-30bp lower than it would have had in euros. Arbitrage has since improved in favour of euros.

“The basis swap has moved about 10bp-15bp over the last few weeks and that has been quite advantageous,” Fiskerstrand told The Covered Bond Report.

The basis swap had dropped from 35bp-37bp to 20bp this week. Furthermore, levels achievable in the Norwegian domestic market have widened.

“What we actually value when issuing in euros is the relative spread to the Norwegian market,” said Fiskerstrand. “The Norwegian covered bond market has widened the past month or so, with a narrowing of the spread difference between euro and Nokkie issues.”

For example, he said, DNB Boligkreditt launched a krone 6.5 year bond at 98bp over on 6 January, 15bp wider than where it sold a six year krone bond at 83bp over in October.

“We had two elements that were running in the right direction, so it was a relative value decision to issue in euros,” he said.

Other reasons for Terra tapping the market yesterday included it not having issued in euros since August 2010 and a redemption coming up in September of a Eu600m trade.

“We decided there was enough traction to do a deal, and it had been a long time since we had done a deal in euros,” said Fiskerstrand.

He added that with the redemption coming up in September, it made sense to be pre-funded given market conditions.

“It’s good to have everything pre-funded and it’s better to have more liquidity than less,” he said.

Fiskerstrand said the pricing was in line with expectations for the euro market.

“In particular, it’s in line with the DNB Boligkreditt trade at 68bp over that was priced not too long ago,” he said.

DNB Boligkreditt issued a Eu2bn five year on 4 January.

Terra decided to issue a five year based on its redemption profile.

“We are a covered bond issuer, so we couldn’t issue much lower than the five year tenor,” said Fiskerstrand. “The five year 2017 is actually a year in which we don’t have any redemptions coming up, so for us it’s a very good spot for asset-liability management reasons.

“The five year is good for banks, specifically treasuries, whereas the longer transactions are bought by pension funds and insurers,” he added.

Banks took 55%, funds 22%, insurance companies and pension funds 16%, central banks 6%, and corporates 1%. Germany/Austria was allocated 59%, the Nordics 26%, the Benelux 8%, Asia/the Middle East 4%, and Switzerland 3%.

As of the start of the year iBoxx extended eligibility for its leading covered bond index to Eu500m deals, but Fiskerstrand said this had not to his knowledge made a difference.

“It’s probably a little bit too early to say,” he said, “but we haven’t heard specific feedback from any investor claiming that that was a reason to buy our transaction.

“The investors that are buying us are focusing more on the high quality, represented by the low – that is to say, good – collateral score from Moody’s, and the low LTV of the pool, rather than the index itself.”

Fiskerstrand said the most surprising thing about the deal was that there had not been many other issuers in the market.

“Perhaps that is to be expected given the blackouts as well as market conditions.”