After having applied for a licence to issue covered bonds in December, Swedish specialist lender BlueStep Bank expects to enter the Swedish krona market later this year, offering investors something “a bit different”, according to CFO Johanna Clason.

Owned since 2017 by private equity group EQT, BlueStep began operations in 2005 and had a balance sheet of around SEK18bn (EUR1.76bn) as of the end of the first half of 2018. 93% of its loan portfolio comprises residential mortgages in Sweden and Norway, where it began operations in 2010, while it also has a small Swedish unsecured consumer loan portfolio.

The business was initially financed by warehouse funding facilities and since 2006 residential mortgage-backed securities (RMBS), but it has since 2008 accepted retail deposits in Sweden and then in Norway, and these today account for some 60% of its funding, according to BlueStep CFO Clason.

The bank set up a SEK5bn MTN programme last year and in December issued an inaugural SEK200m three year senior unsecured bond via lead manager SEB paying a coupon of three month Stibor plus 175bp.

Clason told The Covered Bond Report that BlueStep is turning to covered bonds for funding diversification.

“We believe covered bonds are a good funding source,” she said.

Covered bonds will also allow BlueStep to better currency-match its assets and liabilities, she added.

“We have been doing RMBS for quite a long time,” said Clason, “but many investors are more interested in euros than Swedish kronor and Norwegian kroner for RMBS. As we on-lend in Swedish kronor and Norwegian kroner, we would like to fund more in those currencies in the capital markets.”

BlueStep is bracketed with the large UK non-conforming sector in the RMBS market.

“But we have a very high quality portfolio, with lower loss-levels compared to the UK non-conforming market,” said Clason. “Our customers are typically those that don’t get a mortgage from the traditional banks. It’s typically customers with historic credit remarks or with a need to consolidate other debt into their mortgage.

“It’s also self-employed customers, freelancers, consultants or those with modern jobs, perhaps in the gig economy, so not a full time traditional job. A smaller number are customers with limited credit history.”

BlueStep announced on 20 December that it had submitted an application to the Swedish Financial Supervisory Authority (Finansinspektionen) for a licence to issue covered bonds, and said it expects issuance to begin in the second half of 2019 at the earliest.

“We will definitely start with Swedish krona issuance backed by Swedish mortgages,” said Clason, “and then at a later stage we might issue in Norwegian kroner as well.”

“Our issuance will be a bit different from the traditional banks, since we are not as large and with different pool characteristics,” she added. “But we definitely think that there is room for us as well, and investors we have talked to so far seem to be interested.”