Danish Ship Finance exceeded expectations with a €500m new issue and switch tender last week, with its third euro benchmark showing it to be “much more established” in the euro market, according to its CFO, and high buyback participation potentially encouraging similar exercises.

The new issue and tender were announced on Monday of last week (11 October), with Danish Ship Finance (DSF, Danmarks Skibskredit) mandating Credit Suisse, Danske, DekaBank and SEB as joint lead managers for a €500m no-grow June 2028 transaction, and inviting investors to tender amounts of its two outstanding euro benchmarks for cash, with the two operations anticipated in parallel on Thursday.

DSF offered to buy back up to €150m of its first euro benchmark, a €500m 0.25% September 2022 sold in March 2019, and up to €100m of its second and last previous, a €500m 0.125% March 2025 sold in November 2019, but retained discretion to exceed the provisional caps while at the same time seeking to preserve their LCR Level 2A eligibility with at least €250m of each being left outstanding. The purchase price for the 2022s was set at 100.700, equivalent to a yield of minus 0.49%, and the purchase spread for the 2025s at 16bp over mid-swaps, versus 24bp-25bp in the secondary market.

After investor calls, on Thursday morning the leads opened books for the new €500m no-grow June 2028 issue, rated A by S&P, with initial guidance of the mid-swaps plus 37bp area. A book update after around an hour and five minutes put demand above €600m, excluding joint lead manager interest, and after around two hours and 25 minutes guidance was revised to 35bp+/-1bp, will price in range, with orders above €700m. The spread was ultimately fixed at 34bp on the back of books of around €750m, and the final order book was above €700m, excluding JLM interest, and including more than 35 accounts.

“Shipping assets as collateral are not for everyone,” said Gunner From, global co-head of financial origination at Danske Bank, “but many of the traditional euro investors acknowledge the robust business model and legal framework behind the issue and placed orders – some in significant size.”

German, Austrian and Swiss accounts were allocated 42% of the new issue, the Nordics 41%, southern Europe 9%, France 7%, and the UK 1%. Asset managers and fund managers took 59%, banks 38%, and insurance companies and pension funds 3%.

“We were extremely pleased with the way the transaction went,” said Martin Linderstrøm, head of treasury at DSF. “The strategic rationale is to diversify the investor base, and we feel very much that we’ve achieved that when looking at the composition of the order book – we got a lot of new accounts in and they were coming from the right places.

“We are now getting a footprint that looks more like your run of the mill covered bond – and that helps towards the economics, as well.”

After paying up versus its domestic market with its euro debut, DSF priced its second marginally through Danish krone levels and its latest benchmark priced more than 10bp inside its traditional funding source.

“That does not mean we still won’t need our Danish investors, who will remain our core funding source,” said Linderstrøm, “but we’re now in a position where we can more comfortably say that we’ve got two distinct funding pools.”

Lars Jebjerg, DSF CFO, said that whereas investors had in the first two deals focused on understanding how a ship covered bond works and the issuer’s business model, the issuer is now “much more of an established euro issuer”.

“Even though the collateral is slightly different to most other covered bond issuers, people seem to finally have gotten their heads around this,” he said, “and investors seem to be coming at it from a positive perspective.”

This has been helped by improvements in the sector whereby shipping rates are on average twice the level of the decade following the financial crisis, according to Jebjerg.

“So ship owners’ earnings are overall very strong,” he added. “Capacity is very scarce, rates have gone up, and even last year when the world sort of stopped, our portfolio quality increased markedly as we ended up getting a fairly large volume of prepayments.

“It won’t last forever, but the fact is that we are in a very strong shipping cycle right now.”

The tender offer for DSF’s outstanding bonds was launched alongside the new issue to afford the issuer similar flexibility to that it enjoys in the domestic market, where it regularly buys back and taps krone lines.

“We of course always fund our loans to maturity at inception,” said Jebjerg, “but we have a business model that involves a lot of prepayments and so we would typically have funding surpluses at the short end that we can’t necessarily use to fund new loans. We have found over the years in the Danish market that to be able to buy back and also potentially tap back in if the need arises is a good option, and we see this euro exercise as a natural extension to that.

“We can at the same time also try to create some liquidity for investors.”

The tender closed at 2pm CET on the day of the new issue and a total of €277.1m was bought back, comprising €64.9m of the 2022s and €212.2m of the 2025s, with the aggregate amount exceeding the provisional €250m cap and supporting demand for the new bond. The bonds tendered are being kept on DSF’s books, rather than being cancelled.

Although several covered bond and other issuers have conducted buybacks and exchanges as parts of liability management exercises for financial institutions in recent years, switch tenders such as DSF’s have been rare, hence its outcome was uncertain. The final result was beyond DSF’s hopes, according to Linderstrøm, and represents a vindication of the strategy, according to Andrew Burton, head of DCMS structuring at Credit Suisse.

“As effectively a first crack at this after some half-hearted attempts, it’s a great result,” he said, “getting frankly more than we expected and going through one of the caps. We’ve set a high bar for the future.”

Michael McCormick, head of covered bond origination at Credit Suisse, said such exercises – which are used by other Nordic issuers in their local markets – can add a beneficial dynamic to add to the primary issue process.

“It’s a bit of technology that has been lying around waiting for someone to connect it to the ALM side of their business,” he said, “and we’re really happy to have had DSF successfully try it out. Hopefully we can see it get used more in the future.

“It may not make sense for every issuer,” he added, “but there are plenty of circumstances where also euro area issuers can try to use this to manage liquidity, or their LCR and NSFR ratios.”

Having launched its longest dated euro benchmark in euros alongside the tender, DSF expects to continue in a similar vein going forward.

“We are very committed to the euro programme,” said Jebjerg. “We are very happy we’ve been able to build out the yield curve, which has been a target since the first issuance.

“We certainly see more benchmark issuances, but we also see this format of potentially having a two-way liquidity in some of the probably mid to shorter dated bonds as an interesting option.”

Photo credit: Danish Ship Finance