Luminor launched the first Baltic covered bond amid volatile conditions on Wednesday, but was able to open the Estonian market with a thrice-subscribed €500m deal at the lowest yield achieved by a Baltic non-government issuer, and head of treasury and ALM Olof Sundblad said the issuer was delighted with the landmark trade.

Leads Citi, LBBW, Luminor, Nordea and UniCredit went out on Wednesday morning with guidance of the mid-swaps plus 30bp area for a €500m no-grow five year deal, and the spread was ultimately set at 25bp on the back of over €1.6bn of demand from close to 80 accounts.

Olof Sundblad, head of treasury and ALM, Luminor, described the covered bond as “a landmark transaction” for the Baltics.

“This is the first time a Baltic issuer has come to this market and we were very happy to see such a broad and diverse range of investors in the book,” he told The CBR. “It demonstrates confidence not only in Luminor, but in the economies of the region.”

Estonia’s covered bond law allows for a pan-Baltic cover pool, and although the collateral backing Luminor’s issue is initially only Estonian, assets from its Latvian and Lithuanian operations will be added.

In spite of volatile market conditions, the issuer decided to proceed with its inaugural Estonian covered bond on feedback from its roadshow, according to Sundblad.

“We were ready to do it post-Q4 2019,” he said, “and decided to launch the roadshow in February. Back then the market looked good, but during the roadshow it turned worse because of the coronavirus.

“However, we received so much positive backing from investors we thought we could go ahead with the deal and get it done anyway – which we did.”

Sundblad said the deal went extremely well and that the book, which was over three times subscribed, would have easily been covered even without CBPP3 support.

“We were extremely happy with the strong interest we received,” he said, “and even though we expected the Eurosystem to participate, we were still pleased to see their order.”

Central banks and supranational investors constituted 20% of the book. Almost all the demand came from institutional investors outside the Baltics, with German institutions taking 43% and accounts from 18 countries involved.

Sundblad said that in tightening pricing 5bp from the 30bp area to 25bp for the five year deal, Luminor was able to achieve a level relative to neighbouring Finnish and Slovak paper in line with its hopes.

The deal was priced to yield minus 0.179% and, according to Luminor, represents the first time a Baltic company has been able to borrow in size at negative interest rates and the lowest rate for any Baltic non-government issuer. The expected Aa1 rating of the covered bond issue from Moody’s is the highest for any debt instrument from the region.

Luminor CEO Erkki Raasuke said the deal’s success reflects trust in the newly-established covered bond framework as well as Luminor and the Baltic economies, and reflected the soundness of the local housing market.

Over time, the issuer hopes to have perhaps three covered bonds outstanding, according to Sundblad.

“This covered bond will diversify our funding base by opening up a new, cheap way of funding ourselves,” he said.

“Other issuers in the Baltics are now closely looking at the covered bond market,” he added.

While Estonia is the only Baltic country to have implemented covered bond legislation, Latvia and Lithuania are working to put theirs in place.

See our previous coverage for further background to Luminor’s debut.