Arion Bank will in the coming days finalise a covered bond programme under Icelandic legislation ahead of a debut issue, with a 100% payment record for Kaupthing contractual issuance that the bank is taking over set to prove “extremely important”, according to its head of funding.

Arion Bank headquarters, Reykjavik

Arion is a successor to Kaupthing Bank, which was Iceland’s biggest bank before the collapse of the Icelandic financial system in October 2008. It issued covered bonds between 2006 and 2008.

Arion has reached an agreement with the Kaupthing Resolution Committee on acquiring a Isk120bn (Eu750m) mortgage portfolio of Kaupthing’s bankruptcy estate.

At a bondholder meeting last Friday, Arion secured 100% agreement from holders of outstanding Kaupthing covered bonds for it to replace Kaupthing as issuer of the covered bonds (with a 75% majority having been required). According to Eiríkur Magnús Jensson, head of funding at Arion Bank, the bondholders were mainly Icelandic institutional investors, although also included some foreign accounts.

“We are replacing Kaupthing Bank, which is in a resolution process, and we are fulfilling all the obligations as set out in the original documentation,” he told The Covered Bond Report.

He said that the bank would, for example, be adding collateral where required. The only change to the original documentation is that, with Arion being unrated, references to ratings in the original documentation have been removed. The covered bonds were originally rated triple-A.

Eiríkur Magnús Jensson

Arion has secured a licence from Iceland’s Financial Supervisory Authority (FME) to issue covered bonds under legislation introduced in 2008. Eiríkur Magnús Jensson said that the bank expects to sign its new statutory programme within a few days. Barclays Capital is arranger.

Although Kaupthing’s senior unsecured creditors have faced losses on their bonds, payments on its covered bonds were maintained throughout the crisis. This included a coupon payment on 10 October 2008, the day after Kaupthing collapsed.

“There was never a hiccup on the payment of the bonds,” said Eiríkur Magnús Jensson. “I think this is extremely important for covered bondholders.”

The first covered bonds issued under Icelandic legislation were sold by Íslandsbanki in December 2011, Isk4bn of inflation linked bonds. Eiríkur Magnús Jensson said that Arion will inaugurate issuance off its new programme with an Icelandic króna deal of around Isk2bn targeted, like Íslandsbanki’s, at Icelandic institutional investors. However, the programme will be listed on the Luxembourg Stock Exchange and international issuance could follow.