LHV Pank on Tuesday became the second issuer to launch a covered bond from the Baltics, a €250m five year sub-benchmark, and its head of treasury told The CBR its success demonstrates a trust in the wider Estonian economy and that it now plans to be a regular sub-benchmark issuer.

Kadri Haldre, head of treasury at LHV Pank (pictured), said it had been preparing the debut issue for some time before the coronavirus crisis, and proceeded with its plans hoping that market volatility would ease and improve in time for it to meet investors and ultimately launch the debut issue.

“When the market was almost closed for primary issues, we wondered if we would still be able to print it before the Nordic summer holidays start in around mid-June,” she said, “which had always been our target.

“Conditions turned favourable, however, so we registered the programme documentation on May 19 and decided to move ahead with the marketing straight away, because there was no reason for us to wait, and in the end, this proved to be the right approach.”

Estonia’s covered bond law allows for a pan-Baltic cover pool, although LHV’s covered bond is backed only by Estonian residential mortgage loans. It has an expected rating of Aa1 from Moody’s.

“Some of the investors that we talked to wanted to know what the Estonian covered bond framework is like, although some were already familiar with it from the previous transaction from Luminor,” said Haldre. “Since it was an inaugural issue for LHV, they wanted to know about the bank’s business strategy and also how Covid-19 might impact the bank and its operations. We also discussed the composition of the cover pool, and LHV actually has a very well collateralised and very well seasoned covered pool.”

Leads Citi, LBBW and Nordea opened books on Tuesday morning for the €250m five year sub-benchmark with guidance of the mid-swaps plus 45bp area, and around an hour and 45 minutes later books were reported as being over €450m, excluding joint lead manager interest. Shortly after, the spread was fixed at 40bp on the back of over €470m of demand, including €15m JLM interest, with €450m of orders ultimately good at re-offer.

28 investors participated in the transaction. Central banks and official institutions took 41%, institutional investors in Germany, Austria and Switzerland 19%, the Nordics 19% and others 11%, according to distribution figures from the issuer.

“We were able to tighten it to 40bp based on a very good and high quality order book,” said Haldre. “Of course, there were some discussions about what the right level is – Luminor was an obvious comparable as well as some other Finnish sub-benchmark issuers and Slovakian names – but in the end we reached a very fair level.”

Luminor’s €500m no-grow five year, the first Baltic covered bond, was launched on 4 March and attracted over €1.6bn orders with a re-offer spread of 25bp.

“We expected that there would be some premium over Luminor because of the issue size as well as the size of the bank,” said Haldre, “but we are happy with the result and I think the final level represents a fair level for all parties involved.”

LHV now aims to become a regular issuer of sub-benchmark covered bonds.

“We definitely want to be back on the market, but we’re not ready for a benchmark-sized issue yet,” said Haldre. “We would rather do a few sub-benchmarks rather than one benchmark and then not be back for quite a while.

“LHV is a domestically owned bank and we’ve now been able to tap the international capital markets,” she added, “which really shows that investors are there to support LHV as an institution, but it also represents their trust in the Estonian economy in a wider context.”

Erki Kilu, chairman of the management board at LHV, said the issue enables the bank to refinance short term deposits raised from deposit intermediation platforms with longer term funding and at a lower cost.

“Mortgage loans are a long term product which require a stable source of funding,” he said. “In the longer term, lower funding costs for the bank also translate into more beneficial funding for our clients.”