Arion Bank issued the first Icelandic covered bond in almost three years last week, a €300m five year deal rated Aa1 that achieved the largest book from the country, and the bank now intends to be a more frequent issuer, according to head of treasury Eiríkur Dór Jónsson.

Since Arion sold the first euro-denominated Icelandic covered bond in September 2021, a €300m five year deal, its covered bond rating has improved from A- at S&P to Aa1 at Moody’s.

Arion’s covered bonds had in November 2023 been upgraded by S&P, for a second time, to A+, alongside those of its compatriots, on the back of a sovereign upgrade, before the covered bond rating was withdrawn in March 2024. This followed a consent solicitation exercise launched in February 2024 to remove the S&P rating as well as related clauses from its documentation, leaving the covered bonds rated by Moody’s, which had assigned them a rating subsequent to the euro debut.

The move was the consequence of a broader review of credit ratings by Arion, which decided that rather than the two ratings for the bank it had, one rating would suffice, taking into account considerations such as Nordic banks with similar size and operations only having a single rating. Out of Moody’s and S&P, it dropped the latter for all its ratings, with the bank saying that Moody’s was more appropriate given Arion’s bancassurance business strategy. The bank had recently been upgraded from BBB to BBB+, with stable outlook, by S&P, while its Moody’s rating was A3, with stable outlook, the same as currently.

Arion’s new issue comes ahead of the maturity in October of its debut, which was tapped for €200m in 2022 to take it to €500m.

According to Jónsson at Arion Bank, the issuer stepped up its covered bond investor relations work in the second half of 2024 before moving up a gear last year as the maturity approached. The bank then targeted a new euro issue in the first quarter in its funding plan.

“That played out very well,” he told The CBR.

After announcing its Q4 2025 results on 11 February, the bank on Monday of last week (16 February) announced the mandate for a €300m (ISK43bn) no-grow five year covered bond.

The bank also announced an any and all tender offer for its outstanding euro covered bond issue.

“One reason for the buyback was to support the new issue by giving existing investors the opportunity to rotate out of the old issue into the new one,” said Jónsson. “Secondly, there were internal considerations, including reducing our outstanding wholesale funding and managing our short term maturity profile.”

Leads Barclays, DZ, Erste and UBS opened books for the new issue last Tuesday morning (17 February) with guidance of the mid-swaps plus 47bp area for the April 2031 sub-benchmark. After around an hour and 20 minutes, they reported books above €900m, including €185m of joint lead manager interest, and after around two-and-three-quarter hours, they set the spread at 40bp on the back of books above €1.1bn, pre-reconciliation. The final book was some €1.1bn, with 46 accounts good at re-offer.

“We are very pleased with the transaction,” said Jónsson. “We struck a nice balance between good pricing and the quality of the order book.

“I believe there is clear evidence from our recent transaction that the higher rating supported the new issue,” he added. “We saw a more granular and diversified order book. Our current rating is closer to what investors are used to in the covered bond space, namely Aaa.”

The lack of recent Icelandic covered bond issuance – the last having been a €300m five year deal for Landsbankinn in March 2023 – necessitated a degree of price discovery, he noted. The leads therefore circulated a mix of recent references in the five year part of the curve, including Finnish sub-benchmarks for Ålandsbanken and Hypo, non-Eurozone benchmarks from Bendigo Bank and SMBC, as well as a Aa2-rated benchmark from Italy’s Banco BPM.

“And then,” added Jónsson, “there was of course some dialogue with potential investors about how they would view the transaction.”

The €1.1bn book is the biggest of any Icelandic euro covered bond.

“We were pleasantly surprised by the demand,” said Jónsson. “The order book grew quite quickly and we ended up around 3.5 times oversubscribed, which was far above what we had expected.”

Asset managers took 37%, banks 31%, central banks and official institutions 19%, hedge funds 10%, and insurance companies and pension funds 3%. Germany, Austria and Switzerland were allocated 36%, the Nordics 32%, the UK 11%, the Benelux 9%, Italy 8%, France 2%, and CEE 2%.

Ahead of the new issue, Arion had internal discussions as to whether to go for a benchmark, €500m size, or continue with sub-benchmark issuance, ultimately deciding on the latter course so that it will have the capacity to return sooner.

“We are quite keen to become a more frequent issuer in the euro covered bond market,” said Jónsson. “It’s been five years since we did our last issue and three years since the last Icelandic covered bond in the euro market. And it’s clearly beneficial to be a bit more frequent – we saw that, for example, from this exercise and the price discovery that we had to do as a result of being infrequent.

“So while we can’t promise that we will issue every year or every other year, we strive to become a more frequent issuer – it won’t be five years before the next one. And if we start to see more frequent covered bond issuance from the Icelandic issuers, that will help everyone here in Iceland.”

Landsbankinn’s issue is due in March 2028, while the third previous Icelandic covered bond, a €300m five year for Íslandsbanki issued in September 2022, matures in September 2027.