Arion Bank has issued its first non-inflation linked fixed rate covered bonds, developing a market that restarted when Íslandsbanki reopened wholesale funding by Iceland’s financial institutions with a first deal under Icelandic covered bond legislation in December.

Arion, which emerged out of the failed Kaupthing, on Friday completed the sale of Isk1.2bn (Eu7.46m) of covered bonds, series Arion CB 15, maturing in 2015 and paying a coupon of 6.5%.

“With this bond offering Arion Bank becomes the first of the Icelandic banks to offer fixed rate covered bonds that are not inflation linked,” said Höskuldur Ólafsson, CEO of Arion. “The bank has in recent months taken the initiative in the non-indexed mortgage market by introducing innovative new products and the bond offering now is a logical next step.

“The bond offering also further diversifies the bank’s funding profile.”

According to Íslandsbanki Research analysts, the covered bonds were bought by institutional investors. They noted that yesterday (Monday) the 2016 Icelandic government bond benchmark was yielding 5.78%.

“This is good news and makes Arion Bank the first Icelandic bank to issue non-indexed covered bonds,” said Íslandsbanki Research. “Issuance of nominal mortgage bonds has increased rapidly in the past year. Presumably, the banks aim to finance such lending with further covered bond issuance in the near future.

Arion launched its inaugural covered bond issue in February, Isk2.5bn of bonds paying a 3.6% inflation linked coupon and maturing in 2014, with prepayment permitted from 2017.

Since debuting in December, Íslandsbanki has issued Isk8.815bn of covered bonds, most recently on 4 May tapping two CPI-linked covered bond issues for a total of Isk1.485bn.