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Non-conforming Bluestep sets out stall in SEK1.7bn debut

Bluestep Bank sold its first covered bond on Monday, a SEK1.7bn three year floating rate note priced some 50bp above the Swedish benchmark covered bond curve to reflect the novelty of its offering. Its head of treasury told The CBR it is pleased to have taken its first step in establishing its name.

The non-conforming lender launched its debut after having completed preparations last month, following receipt of its covered bond license late last year, and held investor calls last week.

On Monday morning, leads Dankse, Nordea and SEB opened books at a spread of three month Stibor plus 58bp for the three year benchmark transaction, indicating a minimum size of SEK1bn. Within an hour orders exceeded SEK1bn, according to a banker at one of the leads, and after orders topped SEK1.6bn the leads indicated a minimum size of SEK1.5bn – the size the issuer had in mind. On the back of further orders, the deal was ultimately sized at SEK1.7bn (€155m).

The pricing of plus 58bp for the debut Aa1 rated non-conforming lender’s issue offered a pick-up of some 50bp over the curve of Sweden’s established triple-A rated covered bonds from the likes of SEB and Stadshypotek. The lead banker said this level was based on feedback from a few investors the previous week.

“There was a bit of uncertainty over how to price a new credit into this market,” he added.

He nevertheless said market conditions were conducive to new issuance, with the Swedish covered bond market having been “very solid” compared with others and Riksbank covered bond purchases “very supportive” amid the coronavirus crisis. The fixing of the spread from the outset further reduced uncertainty for investors, he added.

Swedish investors took two-thirds of the paper and Danish one-third, while asset and fund managers were allocated 90% and banks 10%.

Klas Lavemark, head of treasury at BlueStep (pictured), said the issuer is very pleased to have taken a first step in becoming an established covered bond issuer.

“Market conditions could naturally have been better,” he added, “but that is nothing we can control.”

As part of a strategy to diversify its funding source, Bluestep in late 2018 began issuing krona-denominated senior non-preferred bonds, and its entrance into the covered bond market marks the second step in this strategy, according to Lavemark.

“Due to the Covid-19 pandemic, the timeline was obviously affected somewhat,” he added. “Nonetheless, we felt that it would be wise to keep to our original long-term strategy and utilize windows of relative calm in the markets to begin our longer term journey of establishing ourselves as an issuer in the covered bond market.”

The issuer is the first non-conforming lender to enter the Swedish covered bond market, a topic that was addressed in premarketing calls.

“Bluestep’s story was actively communicated to investors during 2018 and 2019 – as part of establishing ourselves as an issuer of senior preferred bonds – so the basics are already fairly well known among investors,” said Lavemark. “As always, we emphasize that a manual and individual credit assessment as well as risk-based pricing is key for us. Such a process is also well suited for periods like this, when more automized credit assessments might have its challenges.

“Some comparisons to the Global Financial Crisis of 2008 naturally also came up, where Bluestep and Sweden managed fairly well in comparison with many other European markets.”

Taking into account the issuance’s Aa1 rating, the lower size than typical benchmarks and Bluestep being a new issuer – on top of prevailing market conditions – some premium versus higher rated, larger and established issuers was only to be expected, said Lavemark.

“We will not be a first-time issuer next time,” he added, “so that part of the premium could well be narrowed. Naturally, we also hope for a brighter future in general, compared to the current pandemic. This would also help reducing uncertainty and thereby likely affect pricing as well.

“We are now looking forward to establishing ourselves further in the covered bond market and working with investors on future transactions.”

Bluestep is now aiming to come to the covered bond market at least once a year, and may also issue in Norwegian kroner and euros in relation to Norwegian and Finnish lending.