Luminor Bank aims to issue pan-Baltic covered bonds as early as next year, subject to the completion of a legal framework, its head of treasury told The CBR, as it moves away from parent funding amid a new structure and the sale of a majority stake to a Blackstone-led consortium.

Authorities in Estonia, Latvia and Lithuania have been working to establish a pan-Baltic covered bond framework, which would facilitate the cross-border pooling of assets from the countries for joint covered bond issuance, now supported by a joint funding model proposed in the European Commission’s planned covered bond directive.

Draft covered bond frameworks have been published for consultation in Estonia and Lithuania, but these do not yet include all of the features that will be included in the final, pan-Baltic framework to enable cross-border issuance. It is hoped the laws will be implemented in early 2019.

Luminor Bank has supported the legislative process and is expected to be at the forefront of Baltic covered bond issuance once the regulation is in place.

“Luminor is supporting the creation of a pan-Baltic covered bonds legislation, to promote local capital markets,” Max Ehrengren, head of treasury & ALM at Luminor, told The CBR. “In addition to this we see covered bonds as an attractive funding source for Luminor, both from a pricing perspective as well as from diversification of funding perspective.

“Given favourable covered bond legislation development in the Baltics, Luminor targets covered bond issuance as early as 2019.”

Luminor was formed in 2017 by a merger of Nordea’s and DNB’s operations in the Baltics. It currently operates as three separate entities in Estonia, Latvia and Lithuania, but will on 2 January 2019 become one centralised bank in a cross-border merger, with the Latvian and Lithuanian banks becoming branches of the Estonian entity.

On Thursday of last week, Moody’s assigned first time ratings to Luminor’s Estonian entity, including a deposit rating of Baa1 and a provisional senior MTN rating of Baa2.

Moody’s cited Luminor’s focus on reducing its dependency on funding from Nordea and DNB, initially via senior issuance, but later via covered bond issuance.

“When regulation permits, the bank also plans to issue covered bonds which would, according to Moody’s expectations, increase the investor base significantly and increase the number of funding sources,” said the rating agency.

The ratings assigned to the Estonian entity reflect a forward-looking assessment of the group as a whole and take into account the merger and a forthcoming change in ownership announced last week.

Nordea and DNB are the current owners of Luminor, but it was announced last week that a Blackstone-led consortium will acquire a majority stake of the bank, in a transaction expected to close in 2019. Nordea and DNB will retain equal 20% stakes, although Nordea has agreed to sell its 20% stake to Blackstone over the coming years.

“We are on the quest to build the leading Baltic bank for local companies and entrepreneurial people,” said Erkki Raasuke, Luminor Group CEO, upon the assignment of the Moody’s ratings. “While doing this, we will re-size our footprint, improve profitability and keep strong capitalisation above 17% CET1.

“We will gradually replace our parent funding with deposits and a stable long term financing. I am confident that Luminor will be one of the most interesting investment cases out of the Baltic region.”