Publicly marketed domestic Norwegian covered bond issuance is at a high in 2011, as new regulations boost demand that issuers are keen to meet with an issuance drive in kroner – partly to improve liquidity, with Basel III in mind. Meanwhile, an unfavourable cross-currency swap recently discouraged Terra BoligKreditt from issuing in euros.

Norwegian covered bond issuers have this year tapped their domestic market to the greatest extent since the country became a covered bond issuing jurisdiction on the back of legislation established in June 2007.

The Norwegian krone covered bond market stands at Nkr250bn of outstandings, of which around more than Nkr100bn (Eu13bn) has been issued so far this year, according to figures provided by SpareBank 1 Boligkreditt. This compares with Nkr12bn of domestic supply in 2007, Nkr54bn in 2008, Nkr221bn in 2009 and Nkr62bn in 2010, according to figures provided by the Norwegian Covered Bond Council, which operates under the auspices of Finance Norway (FNO).

The spike represented by 2009’s figures is something of an aberration, representing a pick-up in issuance triggered by the introduction of a swap scheme by Norges Bank in October 2008, which market participants credit with kick-starting the domestic Norwegian covered bond market.

A Norges Bank Economic Bulletin from November 2010 said that the swap scheme “greatly increased” covered bond issuance, boosting the growth in the number of specialist mortgage companies authorised to issue the product. Before the scheme was introduced there were seven such entities; today at least 24 covered bond issuers are registered with Finanstilsynet.

Vidar Knudsen, chief dealer at DnB Nor treasury, said that the Norwegian covered bond market got off to a slow start, but that this year there have been efforts to increase volumes in the domestic market.

“In the last quarter of 2010 and this year there has been a very large increase in interest in the Norwegian krone market,” he told The Covered Bond Report. “We really want to issue in Norwegian kroner because we can strip out all the swaps that follow international issuance.”

DnB Nor Boligkreditt has issued around Nkr20bn-Nkr30bn in domestic covered bonds this year, according to Knudsen, with the investor base absorbing greater supply.

“The main thing is that investors have been keen to buy NOK covered bonds and we have allowed for that, encouraging it and printing in Norwegian krone as much as possible,” he said.

A new strategy that the issuer has pursued this year, according to Knudsen, is to try to follow up on a large foreign covered bond deal with a corresponding issue in Norwegian krone at similar yields corrected for factors such as the basis swap.

“Many other countries have a fairly large, deep liquid covered bond market, such as in Sweden, Denmark and Germany,” he said. “This is something we lack and we would like to move in that direction, although of course it is a long journey.”

A Norges Bank financial stability report from May mentioned liquidity of the domestic covered bond market in the context of Norwegian covered bonds’ eligibility for level 2 assets under Basel III’s liquidity coverage ratio (LCR).

“For Norwegian OMF (Obligasjoner med fortrinnsrett) covered bonds to be included as Level 2 assets, the Norwegian covered bond market needs to become more liquid,” said the central bank. “Measures by both market participants and the authorities can help to bring this about.”

The Norwegian Covered Bond Council is very focussed on improving liquidity in the domestic market, Helge Stray, chairman of the council and director, rating and funding, DnB Nor Boligkreditt, recently told The Covered Bond Report.

“Discussions are somewhat premature, but the first step is to obtain a more liquid market, more Norwegian krone issuance,” he said. “Both Norwegian krone domestic issuance and secondary trading in NOK covered bonds have increased significantly in the last year, but there is still room for further growth.

“A second step would be to discuss market-making agreements, etc, but for the moment we are waiting for volumes to increase further.”

Other measures identified in the Norges Bank report as potentially contributing to greater liquidity include issuers seeking to increase the volume of individual bonds, and the relevant authorities repealing a regulation (Issue Regulation) that the report describes as placing certain limitations on the issuance of bonds at a discount.

Kristian Fiskerstrand, funding and risk management at Terra BoligKreditt, said that it remains to be seen what covered bonds are deemed eligible for level 2 LCR assets, noting that the Norwegian covered bond market is a very young one with only a short track record to point to, but that “of course liquidity is important for other reasons besides purely regulatory ones”.

“We are constantly looking for ways to improve that,” he said.

This includes increasing the volume of deal series instead of distributing bonds across too many different maturities, he said, and building credit lines with brokers so that they are able to take transactions onto their books and provide liquidity to customers in that respect.

“We have always been focussed on these things, but it is such a young market it takes time for everything to fall into place,” he said.

Terra has issued around Nkr9bn of covered bonds in the domestic market year-to-date, according to Fiskerstrand.

He said that the majority of this is to finance new growth given limited redemptions this year, and that the issuer has raised more funding in the domestic covered bond market this year than initially planned.

“We have refinanced what we want in the Norwegian market instead of in euros because it has made sense from a business perspective,” he said.

The issuer has put on hold a planned euro transaction after a roadshow in September, with the cross currency basis swap a large factor, according to Fiskerstrand.

“It’s probably what is keeping us out of the euro market,” he said. “The cross currency basis swap is around 20bp-25bp, at least 10bp-15bp wider than what has been normal.”

Arve Austestad, chief executive at SpareBank 1 Boligkreditt, said that from 2010 onwards there has been rapid growth in issuance of covered bonds in Norway, and as the market develops it is easier to maintain a benchmark curve.

He attributed the market’s growth primarily to Solvency II regulations encouraging insurance companies to take up of the asset class, and to Norges Bank’s decision to no longer accept unsecured bank debt as collateral for repo as of February 2012.

“In Norway as opposed to Sweden and Denmark there has been a very sophisticated market for unsecured bank debt, but that has disappeared because of the Norges regulation, and covered bonds are taking over demand from that,” he said.