An “overwhelming” response to a debut syndicated euro covered bond from Nykredit on Tuesday came as a surprise to the issuer, the Eu500m five year FRN attracting Eu1.65bn of unexpectedly diverse orders, with today’s ECB meeting cited as a factor in demand.

Nykredit, Denmark’s largest mortgage lender, had issued euro FRN covered bonds before, but had never issued a euro covered bond via syndication, with past syndicated euro issuance having only been of junior covered bonds/senior secured and other instruments. Benchmark syndicated FRNs are meanwhile rare in the covered bond market.

“When you are a new issuer in a market and are also coming out with a product that is off the beaten path, like this floating rate format, you are of course a little nervous about how it will go,” Nicolaj Legind Jensen, head of funding at Nykredit, told The Covered Bond Report.

“Given that nobody has really issued floating rate benchmark euro covered bonds in the last two years, and everybody has been scared about what it would mean to print something with a negative effective yield, we were a little bit surprised that there was such an overwhelming interest in both the product and our name.”

Nykredit announced its plans regarding the debut issue (an SDO (særligt dækkede obligationer)) on 23 August, and, following a roadshow last week, launched the deal on Tuesday morning.

Leads JP Morgan, Natixis, Nordea, Nykredit and UniCredit opened books for the Eu500m (Dkr3.72bn) October 2022 FRN with guidance of the three month Euribor plus 10bp area. Guidance was later revised to the 8bp area on the back of over Eu1bn of orders, before the spread was fixed at 6bp with books in excess of Eu1.6bn, including Eu60m joint lead manager interest.

The deal was priced above par at 102.272 and with a coupon of three month Euribor plus 50bp. The coupon has a zero percent floor, to address the preferences of some investors.

Jensen said the deal had been priced at what Nykredit had seen as “the fair level”, being wider than outstanding issuance from compatriot Danske Bank and inside that of BRFkredit – a more recent entrant to the euro market.

“Danske Bank is an established issuer in the euro covered bond market and so it was natural that we price a few basis points above them,” he said. “The fact we didn’t have to give up anything in terms of pricing versus a standard format euro covered bond was also quite positive.”

Syndicate bankers at Nykredit’s leads estimated that a new five year euro fixed rate for Danske would be priced at around mid-swaps minus 9bp, which they said was equivalent to around three month Euribor plus 1bp, and a new five year for BRFkredit would be priced at around mid-swaps minus 1bp, equivalent to around three month Euribor plus 9bp.

The final book stood at Eu1.65bn, comprising more than 50 accounts. Banks bought 45% of the deal, fund managers 24%, pension funds and insurance companies 17%, central banks and official institutions 12%, and others 2%. Accounts in Germany and Austria were allocated 38%, the Nordics 26%, the Benelux 20%, France 8%, other Europe 6%, and others 2%.

“I think it is fair to say that when we started the roadshow, we feared the floating rate format would be a slight disadvantage for us, but it turned out to be almost the opposite,” said Morten Bækmand Nielsen, head of investor relations at Nykredit. “It was very well received, partly due to the fact that this was a format that caters very much to treasury accounts – many told us they are floating rate-based anyway, so it is fine for them.

“But what was more noteworthy was that there was a number of asset managers that also got involved, either because they have a natural floating rate interest or because they bought this as a protection against rises in interest rates going forward.”

Jensen added that many accounts new to Nykredit’s covered bonds had participated in the deal.

“Some of them we had seen before when we have issued senior and subordinated debt, but they have been unable to buy the Danish standard covered bond, which is normally amortising and in some cases also callables,” he said. “Some of those accounts came in in decent size in the FRN.

“We have also seen a lot of new accounts who, to the best of our knowledge, have not been active in our name before. The message from them is that they have always liked Nykredit, they just haven’t been able to buy us before.”

A banker at one of Nykredit’s leads said demand for the deal was also boosted by its timing – coming before an ECB meeting today (Thursday) – and its five year maturity.

“Besides the Nykredit name, the timing helped – as whether it is today, October, or the end of the year, everyone knows that Draghi will eventually say something that will make the market more volatile and move yields into a different arena,” he said.

“The tenor was also good, as fives are the sweet spot and it seems anything up to seven years works smoother.”

Like all Nykredit’s covered bond issuance, the new issue is match-funding mortgage loans. The issuer’s ability to offer further large euro FRNs will therefore depend upon growth in corresponding lending.

“Whether or not we will be able to source additional lending for this format will be interesting to watch in the coming quarters,” said Jensen. “Given the size of our euro-denominated assets, it could be something that will be interesting going forward.”

Nielsen added that many investors had asked Nykredit whether it will be a repeat issuer in the euro FRN format.

“I don’t think it’s a secret we would like to be,” he said. “But we are sticking to our guns and not putting derivatives in our cover pool, and hence we need the assets to be aligned.”

A banker at one of Nykredit’s leads said interest among other issuers in euro floating rate issuance has increased.

“You clearly have a more engaged conversation with issuer clients on this topic,” he said. “Issuers are interested and people do have this discussion, because if everything sits in floating in your asset pool, then swapping that into fixed to sell to an investor therefore costs you money.”

However, he said the range of potential issuers is limited by maturity preferences.

“If you are a super-frequent issuer used to issuing in the long end, I think it would be difficult to replicate such a success unless you go shorter than you usually would,” he added. “The floating rate market still only really goes out as far as five years – to go longer could be a challenge.”

The latest Danish adjustable rate mortgage (ARM) bond refinancing season – of which the FRN is a part – ended last Thursday, with issuers printing a total Dkr63bn of bullets – resulting in negative net supply of some Dkr26.5bn, which underpinned already tight spreads – and Dkr13.35bn of floaters. Nykredit was the most active issuer, offering Dkr37.5bn equivalent.

Analysts at Danske noted that average spread levels in non-callables across the curve were at their tightest for many years – with one year bullets having not been as tight since December 2006.

“The refinancing auctions generally attracted good interest from domestic and international investors,” they said. “Spreads generally remained low and were relatively stable during the auction period.”