Arion Bank sold the first euro-denominated Icelandic covered bond today (Tuesday), a €300m five year sub-benchmark that attracted over €700m of demand, enabling it to achieve the tightest spread of any Icelandic issuer in any format in more than a decade.

Arion’s mandate was announced on Monday of last week (20 September) and the trade was yesterday teed up with an update after marketing to investors.

“This is something that makes you think a little bit in terms of price discovery, as it is a very special geographical region and also credit – we don’t have many single-As out there,” said a syndicate banker at one of the leads, “and this was the first euro denominated covered out of Iceland. So we took a little bit of time to market and to educate investors on what to expect on the programme, on the structure, etc.

“We had a kind of open-ended marketing, where we were not going to rush this unless we had the right feedback and all the accounts that were looking at the trade were engaged and ready to participate. We sent out the update yesterday that we were looking to execute as early as today, and the feedback was coming through nicely.”

Leads Barclays, Deutsche and UBS then opened books this morning with initial price thoughts of the 32bp area for the €300m (ISK45bn) no-grow five year covered bond, rated A- by S&P. After around an hour and a half, they reported books above €600m, and after around two and a quarter hours set the spread at 27bp on the back of further demand of around €100m, with over 30 accounts from 12 countries involved.

According to Arion, the spread is the tightest achieved by any Iceland issuer, including the sovereign, since the bank was established out of forerunner Kaupthing over a decade ago.

“We are delighted with the response from international investors to the bank’s first international covered bond issue,” said Arion CEO Benedikt Gíslason.

The lead syndicate banker said bookbuilding developed smoothly.

“And when we set the spread at 27bp, there was really very little sensitivity,” she added. “When you are looking at a very niche type of issuer, you have less granularity, but those who are in the book are there because they want to buy it, so it was pretty clean in that sense.”

A syndicate banker away from the leads commended the execution.

“They moved the spread quite nicely and got a big book,” he said. “It’s hard to comment on pricing and relative value.

“It provided a very good spread for a covered bond, which I imagine made the difference,” he added. “It could go maybe to a different investor community than the one for normal, triple-A covered bonds, but they got away with a good trade.”

The lead banker said the Icelandic debut attracted mainly traditional covered bond investors, but those who are happy to also look at “off the run” names.

With no obvious comparables available in terms of rating, geography, size and structure, she said market participants looked at a mix of outstandings for pricing pointers – from double-A rated Baltic sub-benchmarks to CBPP3-eligible single-A benchmarks and even non-traditional triple-A rated covered bonds, such as Japanese issues – before factoring in how much the differences were worth. Arion’s senior preferred four year paper, rated BBB, was meanwhile trading at around 70bp over mid-swaps, and, depending on rating, the differential between covered bond and senior preferred spreads is typically 35bp-50bp, she added.

Having before the financial crisis embarked upon structured covered bond issuance that maintained a 100% payment record through the collapse of the country’s financial system, Icelandic banks turned to legislative covered bonds to make their first steps back into wholesale markets from 2011, and Arion has been issuing domestically since 2012.

“This issue represents an important step in diversifying the funding of mortgages at Arion Bank and brings us closer to the international funding model,” said Arion’s Gíslason. “For example, a substantial proportion of mortgages in Norway are currently funded by covered bond issues in euros.

“We hope that issues such as these will result in lower interest rates for our customers in the future.”

Arion increased the size of its covered bond programme, arranged by Barclays, from €1.5bn to €2bn this year. A banker at one of the leads said further issuance in euros from Arion and its peers – who regularly issue covered bonds domestically – can be expected to follow.