DNB yesterday (Wednesday) raised Eu1bn of prefunding via a 10 year euro benchmark covered bond that it launched to capitalise on tight spreads and a positive market rather than face competing supply in January, according to an official at the issuer, who said that its deals will be smaller than in the past given declining wholesale funding needs.

The Eu1bn 10 year deal is DNB Boligkreditt’s first euro benchmark covered bond since June, when it sold a Eu1.5bn seven year, but its fourth such issue this year after it was quite active in the first half of the year. Few issuers have sold three euro benchmark covered bonds this year, and DNB is the only one to have priced four.

Many syndicate bankers have been calling for issuers to take advantage of a lack of supply and supportive technicals rather than wait until next year to tap the markets, and they may be heartened by DNB’s move given that the issuer’s thinking was very much in line with this strategy.

Thor Tellefsen, senior vice president and head of long term funding at DNB Boligkreditt, said that yesterday’s new issue constitutes prefunding, replacing a deal that would otherwise probably have been launched in January.

“We hadn’t been in the market since June,” he said, “and spreads have tightened significantly since then, so we thought: why not hedge ourselves a bit in terms of spread?

“I’m not certain if spreads will be tighter or wider in January, but there are usually a lot of deals and now we were able to go to market without any competing supply.”

The transaction had an “opportunistic touch”, said Tellefsen, with the issuer only deciding early this week to come to market as it did not need the funding.

This also influenced the size of the deal, which was DNB’s first euro benchmark not to exceed Eu1bn, something that Tellefsen said could happen more regularly.

“We were not aiming for a large deal size, and you won’t see us in the same deal sizes as in the past,” he said.

This is because DNB is growing at a slower rate than previously, and has increased its deposit base, he said, pointing out that DNB Bank’s deposit coverage has increased from 58% at the end of 2011 to 65% this year.

The issuer had a preference for the 10 year maturity, added Tellefsen, with the smaller deal sizes typical of the longer maturity compared with shorter dated issues not a deterrent for the issuer given that it did not need to raise a large amount of funding.

Leads Deutsche Bank, Natixis, Nomura and UniCredit priced the deal at 33bp over mid-swaps on the back of Eu1.6bn of orders, after having gone out with initial price thoughts and then guidance of the low to mid-30s over.

A lead syndicate banker said the new issue premium amounted to around 2bp-4bp, with March 2022 DNB Boligkreditt bonds trading at 30bp over bid before the new issue was announced. Tighter pricing would have been possible, he added, but the issuer decided to fix the re-offer spread at 33bp over to ensure secondary market performance.

At that spread the deal came some 10bp through French government bonds, which discouraged French accounts, who only took 6% of the bonds, according to Tellefsen.

“On a 10 year you would hope for more French participation than that, but there was a strong German bid,” he said. “So except for the, in some way expected, low French participation we are very pleased with the outcome, especially when you consider that we priced a 10 year in March at 61bp over and are now doing one at 33bp over.”

More than 80 accounts were in the order book. Germany and Austria took 66%, Nordics 6%, France 6%, the UK 6%, Italy 4%, the Netherlands 4%, Asia 4%, rest of Europe 3%, and others 1%. Asset managers were allocated 45%, banks 39%, insurance companies and pension funds 10%, and SSAs 6%.