SEB priced its first euro benchmark covered bond since March 2011 yesterday (Monday) after feeling that it was “due time” to return to what is its most strategic foreign market, said an official at the issuer, with a more acceptable cross-currency basis swap also behind the timing of the deal.

John Arne Wang, SEB

The issuer priced a Eu1bn no-grow seven year at 15bp over mid-swaps after leads Barclays, BayernLB, Crédit Agricole, RBS and SEB built an order book of Eu1.5bn, excluding lead interest. The deal is the first Swedish euro benchmark covered bond since March 2012 and the first euro benchmark issue from any jurisdiction in nearly three weeks.

The transaction represents SEB’s emergence from an exclusive focus on the Swedish krona market last year in terms of covered bond issuance, according to John Arne Wang, head of treasury management at Skandinaviska Enskilda Banken, with the issuer responding to strong domestic investor appetite and calls for actions to further improve the liquidity of Swedish krona benchmarks.

“In 2012 we only issued covered bonds domestically to expand the size of our benchmarks to levels comparable with those of our larger peers in Sweden,” he said. “That was an active strategy on our part.”

The euro-Swedish krona basis swap also made the euro market prohibitively expensive compared with the domestic market in 2012, said Wang, with the difference between pricing for a five year deal in euros and Swedish krona standing at around 50bp at the beginning of the year.

“Due to an exaggerated basis swap, funding in euros was literally impossible,” he said. “It normalised over the course of the year, and the diminishing spread made it less unfavourable to issue in euros.”

SEB also considers euros to be its single most strategically important market after Swedish kronor, and typically wants to issue a benchmark once a year to meet investor demand and maintain a liquid benchmark curve as long as economics do not differ significantly from the domestic market, according to Wang.

“It was due time to return,” he said, adding that the lack of recent supply of euro benchmark covered bonds in general encouraged the issuer to come to market yesterday.

“We tried to time the deal in optimal fashion,” he said, “taking advantage of the lack of supply and thereby achieving a strong transaction with literally no new issuance premium. In euro funding terms, the spread level was historically attractive and we feel that the seven year maturity worked particularly well.

“Overall we are happy with the pricing and we feel it shows the strong position of SEB covered bonds in the market.”

A lead syndicate official said that at 15bp over, SEB’s deal came flat to what is already a tight secondary market curve. Outstanding Eu1bn 2.625% October 2017s and Eu1.25bn 4.125% April 2021s were at around 5bp over and 16bp over mid-market, respectively, before yesterday’s deal, he said.

“The pricing they achieved is really impressive,” he said. “The fact that they got to price through Nordea is quite something.”

Nordea Bank Finland sold a Eu1.25bn seven year at 16bp over on 8 January. Initial price thoughts for SEB’s deal yesterday were the mid to high teens over mid-swaps, and guidance the 16bp over area.

A syndicate banker away from the deal said that it was not a blow-out, but a good achievement nonetheless, and also noted the tighter pricing than for Nordea’s deal, which came at a time when the market was very strong.

The syndicate banker said that a tight spread such as that on SEB’s deal limits demand.

“At these sorts of levels you’re not going to get the enormous order books like this time last year,” he said.

Comparing the pricing of SEB’s euro deal with the cost of issuing domestically is difficult, according to Wang, given that there is not much of a liquid market for SEB Swedish krona issuance beyond five-and-a-half years. The re-offer spread on yesterday’s euro issue was equivalent to 49bp-50bp over Stibor versus SEB’s longest domestic benchmark, June 2018s, which is trading at 38bp over Stibor, he said.

“So in comparison the additional spread we had to pay was definitely within what I would describe as the acceptable range,” he said.

German-speaking accounts drove the transaction, in line with the issuer’s expectations, according to Wang.

“We knew German demand would be critical to place a successful transaction,” he said. “Swedish covered bonds are comparable to Pfandbriefe in terms of spread and quality, so they increasingly attract similar investors.”

The importance of the German-speaking investor base is reflected in combined German and Austrian allocations reaching a record 61%, with bank treasuries playing a large role in this, according to Wang.

“Asset managers and fund managers may have been more of a driving force last year,” he said, “but there has been a big shift in the market, in part because bank treasuries are expanding their liquidity buffers, and our deal emphasises that.”

Another significant change that highlights yield and investor dynamics is that the French share was only 4%, said Wang, which is because Swedish covered bonds trade inside OATs in longer maturities.

Alongside Germany and Austria’s 61% share, the Nordics took 16%, the UK 13%, France 4%, the Benelux 3%, Switzerland 2%, and others 1%. Banks took 66%, fund managers 20%, central banks and SSAs 8%, and insurance companies 6%.