Having waited out rates volatility, Danish Ship Finance sold a €500m ship covered bond last Tuesday and enjoyed a “bigger and better” book than on previous euro benchmarks, as investors followed S&P in looking at it more favourably than ever, according to the issuer’s funding team.

A catalyst for the latest Danish Ship Finance (DSF, Danmarks Skibskredit) euro benchmark was the upgrade of its ship covered bonds from A to AA- by S&P on 10 January. This followed a revision of the rating agency’s systemic importance and jurisdictional support assessment of Danish ship covered bonds from moderate to strong, announced on 2 January.

The issuer welcomed the move, noting that its covered bonds would henceforth qualify as Credit Quality Step 1 and see their EU LCR treatment improve, from Level 2A to 1B.

“We had a lot of investor dialogue on the back of that,” Martin Linderstrøm, head of treasury, DSF, told The CBR, “and also engaging with them on the wider backdrop and geopolitical considerations. Shipping is doing really well, and we found that they – like S&P – increasingly understand why shipping is important, and our role in financing the industry.”

CFO Lars Jebjerg noted that shipping accounts for close to 90% of global goods trade and has a growing role to play in areas such as Europe’s energy security.

“Trade remains overwhelmingly seaborne,” he said, “with shipping still the most effective way economically, but also environmentally, to transport large volumes over large distances. And the unfortunate backdrop of gas pipelines being unused or blown up has only meant that shipping has taken on an even greater role – five, six years ago we were cautious on financing new LNG vessels, for example, and stepped away from that for some years, but it has turned out to be one of the biggest booms.

“It shows how shipping remains pivotal in many areas,” added Jebjerg. “We therefore see fairly substantial investment needs and will be serving that demand.”

The diversification shipping offers from the bricks-and-mortar core of the covered bond market is increasingly welcomed, according to Simon Hajaj Ruby Harmat, head of funding and investor relations.

“More and more people see value in the fact that we are offering a euro covered bond whose underlying assets are not correlated perfectly with residential housing across Europe or commercial real estate,” he said. “So the shipping element and intrinsic diversification on offer is a really good value proposition in our dialogues with investors.”

While Danish Ship Finance’s focus on pre-funding meant that it could have waited until the autumn or even next year before working on a new euro benchmark, the positive noises from S&P and investors encouraged it to consider moving now.

“Meanwhile, the euro market seemed to be in a really good spot,” said Linderstrøm, “and we wanted to take advantage of that and actually come a little earlier than our funding need necessitated.”

Following the release of its annual report on 27 February, on 3 March, the mandate was announced with Barclays, BBVA, Danske, DekaBank and NordLB at the helm of a planned €500m six year issue and investor calls scheduled that day and the next.

However, Germany’s fiscal announcements on 4 March roiled European fixed income markets, meaning that no euro benchmark covered bonds were launched for more than a week.

“We’d had really solid investor feedback,” said Linderstrøm, “but then on the Tuesday night the German government came with its debt bazooka and left the foundations of the euro rates market a little shaken. We therefore took the easy but very prudent decision to postpone the issue.

“We wanted this to be a good transaction for ourselves, but also for investors, and bringing something to a market where even the benchmarks – the German Bund and the euro swap curve – were all over the place was not the right way forward. So we hit the pause button, as did other issuers from what we could see, and waited until the market was open and active again.”

Eika Boligkreditt on Thursday, 13 March, and then NN Bank on the Friday reopened euro benchmark issuance, with the market , and Nationwide Building Society successfully followed them on Monday of last week (17 March).

“It was then very easy to reconfirm the interest with investors,” said Linderstrøm, “and the feedback hadn’t really moved to any significant degree from before the German debt debacle to after.”

Books were opened on Tuesday morning (18 March) with initial guidance of the mid-swaps plus 85bp area for the €500m (Dkr3.4bn) no-grow March 2031 issue, and pricing was tightened to 77bp on the back of a peak €1.55bn-plus of orders, with the final book above €1.35bn.

“The quality of the book really allowed us to work on price,” said Harmat. “We had a peak of €1.5bn before setting terms, and were able to close the books with 2.7 times oversubscription, so no material change in the overall size of the book, giving us the flexibility to have a great transaction with the investors we had involved.”

A syndicate banker at one of the leads said the book was “bigger and better” than any previously enjoyed by DSF on euro benchmark issuance.

“This was a fantastic trade, insofar as you had more investors than usual for them, and also a more granular book,” he said. “They had five or six accounts at the top of the book with massive orders that drove its size, but also accounts that are more covered bond-focused, not only those with wider mandates.

“I think the double-A rating helped people, as did the amount of investor work they have done. And just the general willingness to put cash to work in the covered bond market was enormously helpful.”

Although the new issue premium of around 7bp is at the higher end of those paid this year, the issuer was able to tighten pricing to a level a couple of basis points inside its base case, according to the lead banker.

“There’s always price discovery on these DSF trades,” he said, “and even though you see a lot of travel on new issues these days, on this one, it literally is a matter of discovery – what exactly is the right pricing for shipping collateral? But pulling it in to 77bp was clearly a few basis points more than anybody could have counted on or hoped for, and the book held together well.”

Asset managers were allocated 48%, bank treasuries 22%, pension funds and insurance companies 20%, hedge funds 8%, and other accounts 2%. Nordics investors took 48%, Germany, Austria and Switzerland 26%, the Benelux 13%, southern Europe 7%, the UK and Ireland 4%, and 2% went elsewhere.

“It’s probably the best trade they have done in their time in the euro market,” added the lead banker. “And remember: it’s not like this is a super-defensive maturity like a two or three year; this is a six year, so a little bit out the curve.”

The issuer had a €500m issue maturing on Thursday but the timing of the new issue was not driven by this, according to Linderstrøm.

“We had already bought back a significant amount in some buyback exercises in conjunction with earlier issuance,” he said. “From a liquidity perspective, we had already handled the liquidity need from this maturity.”

In autumn 2021, DSF sold a new €500m covered bond while tendering for the March 2025 issue and its debut euro benchmark from 2019, a €500m September 2022. The issuer then held off issuing after approaching the market in June 2022, before its last euro benchmark, a €500m three year in October 2023.

“We always issue the funding before making loan commitments,” said Jebjerg, “and the strength of our pre-funding model – which is maybe a little different to some other issuers – is that if there is a period of uncertainty in the markets, then we can help everyone by just stepping away from that.

“But we are committed to being a regular issuer and making sure investors get what they need.”

Last week’s euro benchmark is DSF’s fifth since it began diversifying into the currency from its home Danish krone market.

“We came from a very happy place in the Danish covered bond market, which was already a very significant platform,” said Jebjerg, “but we consciously wanted to expand out and establish a presence in the euro market. We are now in a really good place in the euro market, very much in line with what we set out to achieve some years back.

“Many investors who weren’t familiar with ship covered bonds six years ago today are and see us as a part of the landscape.”

The issuer will nevertheless continue working on its euro issuance, not least the pick-up it pays over mortgage-backed covered bonds.

“We still see upside in terms of pricing,” said Linderstrøm. “The fact is that there is, on a like for like basis, still a premium on our bonds and we don’t really see a fundamental need why that should be the case. When we look at the credit quality of the underlying collateral, the credit quality of us as an institution, but also, quite frankly, the way that the bonds have been trading, it’s clear that we are a very strong alternative – the very nice growth in terms of new names that this issue brought in is a testament to that.

“So, yes, we are in a happy place; we could still be in a cheaper place down the road. But I’m sure that will come.”