Danske Bank sold a Skr5bn (Eu546m, Dkr4.08bn) April 2018 floating rate covered bond backed by Swedish and Norwegian residential and commercial mortgages yesterday (Wednesday), which was the Danish bank’s first covered bond issue in Swedish kronor in more than two years.

The deal was issued out of Danske’s cover pool “C”, which comprises 88% Swedish collateral alongside 12% Norwegian collateral.

Before yesterday’s transaction, Danske had issued two Swedish krona covered bonds out of its C pool. However, previous issues have been in fixed rate format, in line with Swedish benchmark covered bonds.

According to a DCM official at sole lead Danske, the choice of floating rate format reflected feedback from investors ahead of the new issue – a series of meetings and calls with some 25 Swedish domestic accounts was conducted at the start of the week. He said that interest in the floating rate format could be explained by low interest rates as well as the audience for the new issue, which largely comprised bank treasuries.

Danske went out at 10.00 CET yesterday with initial guidance of the three month Stibor plus the low 20s area and within an hour books approached Skr5bn. Orders grew to more than Skr5.5bn and after midday the spread was fixed at 20bp over, with little spread sensitivity seen among investors. According to Danske, this allowed for the maximum targeted size of Skr5bn to be printed.

The Danske DCM official said that the pricing was roughly equivalent to the low single-digits over mid-swaps in euros. He said that this was in line with where Danske’s covered bonds trade in euros.

However, he noted that apart from one C pool issue, all of Dankse’s euro covered bonds are issued out of its “I” cover pool, which is purely residential collateral – with the C issue trading in line with the rest of the curve. He said that in the past commercial collateral may have been considered lower quality than residential, but that more recently overcollateralisation required from a ratings perspective had fallen sharply because the commercial cover pool has lower asset-liability mismatches.

Bank treasuries were allocated 72% of the issue, asset managers 16%, and pension funds and insurance companies 12%. Swedish accounts took 80%, Denmark 18%, and other Europe 2%.

Danske noted that that an appeal of the FRN to bank treasuries was that, given the final issue size, it could achieve Level 1 treatment based on current expectations regarding Liquidity Coverage Ratio (LCR) rules.