Swedish non-conforming lender Bluestep Bank is monitoring the coronavirus-roiled markets for an opportunity to issue its first covered bond, having received a provisional Aa1 covered bond rating earlier this month, IR head Louise Bergström told The CBR, as it branches into Finland and after ending its personal loan offering.

As reported in January 2019, Bluestep has been working towards entering the covered bond market for some time, and on 2 March it received a provisional Aa1 rating for its issuance from Moody’s.

This followed an upgrade of the bank’s deposit rating in mid-February from Baa2, on stable outlook, to Baa1, on positive outlook. Moody’s cited increased buffers of loss-absorbing liabilities – comprising SEK2bn (€183m) of senior preferred bonds – as well as strong capitalisation and profitability.

Bluestep’s funding diversification away from residential mortgage-backed securities (RMBS) and warehouse facilities into senior unsecured and covered bonds was also noted by the rating agency, with caveats.

“While Moody’s typically views Swedish covered bonds, which the bank aims to issue during 2020, as a stable source of funding, BlueStep is the first covered bond issuer within the non-conforming segment, and the liquidity of these instruments remains to be tested.

“Furthermore, the large volumes of senior debt that the bank issued during 2019 have short maturities of two and three years and have high refinancing risks.”

Bluestep head of investors relations Bergström said the bank manages its redemption profile carefully to avoid excessive refinancing risks, and is confident its covered bond issuance will find its place in Sweden’s covered bond market.

“Lending standards and loan performance are strong in the Nordic region, and Bluestep is no exception in this case,” she told The Covered Bond Report, noting that net credit losses amounted to 11bps for Bluestep’s mortgages during 2019. “The access to high quality data in the Nordics also makes the underwriting more reliable compared to many other European countries. This means lower risks for Bluestep, and therefore also for investors.

“As the future covered bonds are expected to be rated Aa1, there will naturally be some yield pick-up compared with Aaa rated bonds, which we hope will attract investor interest.”

Bergström cited progressively tighter margins on the SEK2bn of senior preferred bonds issued as evidence of investor appetite for Bluestep’s credit story.

“With regards to the risk appetite of investors, we have gradually established Bluestep as an issuer of senior preferred bonds in Sweden since late 2018,” she said. “As with our senior preferred bonds, we hope to see a diversified investor base and appetite for our covered bonds.

“For us it is important to highlight that the relation between ourselves and our investors is long term,” she added, “and therefore we will try our best to achieve a fair pricing to build on for the future.”

The issuer is now monitoring the markets for an opportunity to debut.

“As we are well funded and have a strong capital base we do not need to rush,” said Bergström. “Timing for any issuance is naturally always dependent on market conditions, and especially so after the Covid-19 outbreak.”

“Going forward we intend to be a regular issuer of both covered bonds as well as of senior preferred bonds,” she added, “and for us it’s important to have a diversified funding structure.”

When Bluestep does debut, it will do so in its domestic market.

“The first transaction will be denominated in SEK and therefore likely suitable for the Swedish investor base, but we hope it also could attract some interest from foreign investors,” said Bergström. “Maturity-wise we are somewhat flexible, but will take care to spread maturities for all our capital market transactions.”

According to Moody’s, Bluestep’s cover pool totals around SEK3.7bn. It had SEK8.323bn of Swedish residential mortgages at year-end 2019 and SEK6.741bn (NOK7.245bn) of Norwegian.

As reported previously, Bluestep could follows up its domestic activity with Norwegian krone issuance, and is also able to issue euro covered bonds off its programme.

“We have a well-established branch in Norway,” said Bergström, “and we are also expanding our operations into Finland, so there will be funding interest from our side in other currencies as well going forward.”

The bank gained approval to establish a Finnish branch in December.

“In Finland we haven’t seen our type of product being offered yet, but at the same time we see a large demand for it,” said Bergström. “It’s therefore a natural step in the expansion of our mortgage business.”

The bank recently decided to cease offering personal loans, which had previously constituted less than 10% of its lending.

“By discontinuing the consumer loan offering, we will be able to focus our resources on our mortgage business and strengthen Bluestep’s position as a modern mortgage bank,” said Bergström.

“The foundation of our operations is based on the fact that there are a lot of people being turned down by the traditional banks, as they don’t fit into standardized scoring models for one reason or the other,” she added. “This can include customers with limited or more adverse credit history, but it also includes customers with modern jobs, customers wishing to consolidate debt and retirees.”