Initial price thoughts on a Eu1bn Stadshypotek deal yesterday (Tuesday) that had to be widened were considered too aggressive by market participants away from the deal, but they said investor pushback was dealt with correctly and it raises wider questions over execution.

Stadshypotek parent, Svenska Handelsbanken, Stockholm

The Swedish issuer priced its five-and-a-quarter year deal at 14bp over mid-swaps, the tight end of guidance of the 15bp over area but wide of initial price thoughts of the high single-digits, which had failed to trigger sufficient momentum for the Eu1bn minimum benchmark-sized trade the issuer was targeting. The eventual order book was Eu1.6bn.

A syndicate banker away from the leads said the deal was around 13bp-14bp over today (Wednesday).

A banker at one of the leads – Danske Bank, Deutsche Bank, Société Générale and Svenska Handelsbanken – declined to give the volume of orders that had been placed in response to initial price thoughts, but said that the investor response was divided in two.

One category of investors, mainly bank treasuries, “clearly had a void” in terms of their exposure to Swedish covered bonds and view Stadshypotek as a premier name so placed orders in sizes typical for them, he said. Others accounts, however, more of the asset manager type, he said, resisted the high single-digits and called for a larger spread given more attractive covered bonds in the Nordic and other market segments.

Stadshypotek’s deal is its first euro benchmark in almost exactly one year, and only the second from Sweden this year.

Market participants outside the deal said the high single-digits was tight. An investor described it as “too tight”, while a syndicate banker said he thought the level was punchy and that this was borne out by the way in which the deal unfolded.

However, syndicate bankers The Covered Bond Report had spoken to yesterday morning before the spread was widened did not raise the alarm, and since then several have said that the high single-digits was not wholly inappropriate.

“They got their tactics wrong,” said a banker away from the deal. “The level isn’t off the charts and no-one was doubting the credit quality, but they did things back-to-front.”

The right tactic would have been to offer a more generous initial spread to gauge investors’ response and then potentially tighten the level, he said.

At 14bp over the deal ended up coming with a “meaningful” new issue premium, of 7bp-8bp, said a syndicate banker away from the leads, who said that the issuer’s March 2017s were trading at around 3bp over when the new issue was announced, but that the high single digits did not seem “ridiculous” from a relative value perspective.

Several bankers away from the deal were fairly understanding about the execution of Stadshypotek’s deal despite those involved having “got it wrong”, noting that the right decision was taken to rescue the deal and that the issuer still ended up with a Eu1bn trade at a decent level. Indeed, a couple acknowledged that they might have ended up in the same mess – “It could have been me,” said one.

Another said that his advice on pricing wouldn’t necessarily have been different, although he would not have recommended going with a five year maturity – which he suggested Nordic issuers would now look to tap in the US dollar market rather than euros – but would have suggested a longer dated deal, such as a seven year.

A banker at one of the leads said that June 2018 maturity was chosen because the issuer has a very large domestic issue maturing in March and wanted another maturity in the five year range but not the same month.

He acknowledged that the seven year maturity has been a “sweet spot” in covered bonds this year, but said that deal was intended to cater to those accounts who cannot go out to that maturity. A longer maturity would arguably not have made much of a difference to the dynamics of the transaction, he added.

The issuer still ended up with a very good result compared with domestic market covered bond funding levels, he said, with 14bp over equating to a premium of the mid-single-digits over Swedish krona levels.

Timing also contributed to the underwhelming initial response to Stadshypotek’s deal, according to market participants, with one noting that the transaction was announced relatively late and questioning why “you had to be out yesterday in a low volume year”.

An investor said that initial price thoughts were too tight and that demand for non-euro-zone covered bonds is weakening, with investors no longer prepared to buy at very tight levels and risk appetite increasing, but that the initially targeted spread of the high single-digits would probably have been achievable had Stadshypotek hit the market in a risk-off phase.

CaixaBank was one of four issuers in the FIG market yesterday and priced a Eu1bn five year cédulas on the back of around Eu2.7bn of orders, with other transactions also going well.

The lead banker said a more risk-off sentiment would arguably have made a difference to the deal, and that investors prioritised deciding about the other supply in the market over Stadshyptoek’s deal, but that intra-day execution was the target and that the leads therefore changed tack.

In the end those involved in the deal did what was needed, he said.

Stadshypotek’s deal also brings up questions about broader issues, such as International Capital Market Association guidelines about soft-sounding and investor communication, said market participants.

“It would have been great to be able to soft sound a few investors,” said the lead banker, with a banker away from the deal saying it pointed to the difficulty investment banks are having reconciling ICMA guidelines with getting a handle on investors’ pricing views.

An investor that the deal raises questions about whether there is still a need for an indications of interest stage in deal execution after all.

“Leads and issuers apparently can’t agree on market-appropriate spread guidance,” he said, adding that in many transactions the spread has been tightened considerably from initial price thoughts once books are opened.

“Do they want to take investors for a ride?” he asked.

Stadshypotek representatives did not respond to enquiries.

Germany & Austria took 46%, Nordics 27%, Asia 8%, France 7%, the UK 4%, rest of Europe 5%, and rest of the world 3%. Banks were allocated 41%, asset and wealth managers 38%, central banks 10%, bank treasuries 6%, insurance companies and pension funds 3%, and retail 2%.