Announced last month, the first green covered bond to be backed by forestry loans attracted final demand of over SEK7bn after the book had peaked at around SEK12bn before the final pricing was set.

“We feel this deal was a great success,” Andreas Birgersson, senior funding manager at Landshypotek Bank, told The CBR. “We had big expectations for investor interest, but we could never have dreamed that after half an hour we would have an order book of around SEK12bn – that is a very strong order book in that short time.”

“We had great hopes, but in the end they were exceeded.”

The deal is the largest green bond denominated in Swedish kronor to date, surpassing SEK5bn issues by German agency KfW and Kommuninvest, the Swedish local government debt office.

“Our intention was always to print the SEK5.25bn size,” said Martin Kihlberg, chief sustainability officer and general counsel at Landshypotek Bank.

Birgersson said the deal was priced with “a very good greenium”, offering the issuer a 6bp saving, estimating that an equivalent non-green issue for Landshypotek would have been priced at around 33bp.

“We are very happy with the price,” he added.

Charlotte Asgermyr, chief covered bond and FI market strategist at SEB, agreed that the deal was priced with a sizeable saving versus the expected pricing of a corresponding deal on Landshypotek’s non-green curve.

“We assess that they saved around 5bp,” she said.

Asgermyr added that the green deal was priced 5bp above the five year point on the covered bond curve of compatriot Stadshypotek and estimated that a non-green Landshypotek deal would probably have been priced around 10bp wider than Stadshypotek’s curve.

She noted that there has been further evidence of “greeniums” in the Swedish krona market, with Kommuninvest’s two Swedish krona green bonds to date having been priced inside its conventional curve.

Birgersson added that through the deal Landshypotek reached some accounts from across the Nordics that had not invested in the bank’s issuance before, and that the order book was supported by a number of high quality, dedicated green accounts.

Leads Danske, Handelsbanken and Nordea launched the five year deal on Wednesday morning with guidance of 29bp-32bp over mid-swaps, indicating that the deal’s size was expected to be sufficient to ensure eligibility for Level 1B under Liquidity Coverage Ratio requirements.

After around 40 minutes, the leads revised guidance to 27bp-29bp with books around SEK12bn, excluding joint lead manager interest. Some accounts subsequently dropped out of the book, while others came in upon the new guidance. With books still above SEK10bn, guidance was revised again to 26bp-27bp, will price in range. Then, one hour and 30 minutes after launch, the size was set at SEK5.25bn (EUR510m) and spread at 27bp. The book closed at over SEK7.2bn, excluding JLM interest.

Acknowledging how some investors dropped out of the deal when guidance was revised to 27bp-29bp, Birgersson noted that demand nevertheless remained strong throughout the process, with the additional accounts coming in at the new guidance level.

SEB’s Asgermyr noted that the execution of Kommuninvest’s most recent green bond followed a similar pattern, with demand peaking quickly, then falling when the guidance was revised tighter.

“I wouldn’t say this was greater than normal price sensitivity,” she said.

Investors ‘see forestry potential’

The deal came after Landshypotek held investor meetings on Monday and Tuesday to present its green bond framework. Under Landshypotek’s framework, proceeds can be used to finance sustainable forestry, renewable energy and green buildings. The inaugural issue is backed by forestry loans – which were already in Landshypotek’s cover pool – and is the first green covered bond to be backed by such collateral.

“It is particularly gratifying to be the first to issue a green covered bond backed by Swedish forests,” said Kihlberg. “It is unique and is fully aligned with the bank’s operations to make a real impact in promoting a sustainable society based on entrepreneurial activity across the country.

“It is positive that investors can see the financial and environmental potential in Swedish forests.”

To be eligible for the bond, the forest properties must have certifications from the Programme for the Endorsement of Forest Certification (PEFC) or the Forest Stewardship Council (FSC) or they must have green forest management plans that include setting aside areas of particular conservation value. Properties must also have 5% deciduous trees to promote increased diversification, increased biodiversity and storm protection.

The bond is backed by forest holdings totalling 320,000 hectares, encompassing around 1.4% of Sweden’s productive forests and absorbing slightly more than two million tonnes of carbon dioxide every year, according to Landshypotek. The forests are privately owned.

Landshypotek’s green bond framework is aligned with ICMA’s Green Bond Principles and has received a second party opinion from Cicero, which gave the framework a “dark green” shading – the best ranking on its shading scale.

Only one other green covered bond has been issued out of the Nordic region to date, a EUR1bn issue for Norway’s SpareBank 1 Boligkreditt in January.

Photo credit: Landshypotek

Leads Danske, Handelsbanken and Nordea launched the five year deal this morning with guidance of 29bp-32bp over mid-swaps, indicating that the deal’s size was expected to be LCR Level 1B-equivalent.

After around one hour and 20 minutes, the leads revised guidance to 27bp-29bp with books around SEK12bn, excluding joint lead manager interest. The spread was later fixed at 27bp and the size at SEK5.25bn (EUR510m) with books above SEK7.2bn good at re-offer, excluding JLM interest.

Landshypotek held investor meetings yesterday (Tuesday) to present its green bond framework. Under Landshypotek’s green bond framework, proceeds can be used to finance sustainable forestry, renewable energy and green buildings. As previously reported, the inaugural issue is expected to finance only sustainable forestry, financing forestry loans already included in Landshypotek’s cover pool.

Only one other green covered bond has been issued out of the Nordic region to date, a EUR1bn issue for Norway’s SpareBank 1 Boligkreditt in January.

Although the new issue is the first green covered bond issued out of Sweden, the country has taken a leading role in the wider green bond market, with EUR9.7bn equivalent of outstandings as of the end of 2017 making it the sixth largest green bond market in the world and by far the largest in the Nordics, according to figures from the Climate Bonds Initiative (CBI). Almost EUR6.5bn equivalent of the Swedish green bonds outstanding are denominated in Swedish kronor.

Photo credit: Landshypotek

The issuers that now benefit from the higher TPI are: Nordea Hypotek; Swedbank Mortgage; Stadshypotek for both its Swedish and Norwegian cover pools; SEB, the Swedish Covered Bond Corporation; and Länsförsäkringar Hypotek. Moody’s said that it had analysed each programme on its own merits.

“The revised TPIs of Probable-High reflect the relative strength of Swedish covered bonds, which have become established as a core European market in the years following the introduction of the Swedish covered bond law in 2004,” it said.

Moody’s assigned a TPI of “probable” to Swedish covered bonds after the country in 2004 introduced the instrument to replace its previous mortgage bond system, with the lack of a track record a factor in the rating agency’s decision. Moody’s said that the growth of the market since then has been steady and its performance strong.

“Swedish covered bonds are now the key funding instrument for Swedish banks and the Swedish mortgage market,” it said. “Covered bonds are the most important source of funding for lending against residential properties in Sweden.”

Moody’s also noted covered bonds’ importance for domestic investors.

“Support from domestic investors includes strong structural demand from Sweden’s well developed mutual fund and compulsory and voluntary pensions market,” it said. “Given the low levels of Swedish government debt – projected at 35.5% of GDP at year-end 2012, according to the International Monetary Fund – domestic covered bonds are an important alternative investment choice for local investors and Swedish fund managers.

“The Swedish Riksbank has also been publicly supportive of covered bonds as instruments for funding and investment,” Moody’s added.

The rating agency said two key factors driving the new TPI of “probable-high” are, in its words:

(i) the strong liquidity and spread performance of the Swedish covered bond market throughout the2008-9 crisis; and

(ii) the market’s importance to domestic funding and investment

The rating agency also cited as supportive of the TPI:

(i) the 2010 amendment to the covered bond law to improve liquidity for refinancing covered bonds following an issuer default; and

(ii) the good underwriting quality and homogeneity of Swedish residential mortgage loans

Bernd Volk, head of covered bond research at Deutsche Bank, said that, with the different effects of “probable” and “probable-high” TPIs only kicking in at senior ratings of Baa3 or lower, the improved TPI currently makes no difference.

Separately, Moody’s today (Tuesday) withdrew its issuer rating of Landshypotek, which it had in May lowered to Baa2, on stable outlook. The Swedish bank said last month that it was dropping the rating agency ahead of adding a second covered bond rating – Standard & Poor’s rates the issuer and its covered bonds, while Fitch rates the issuer. (See article here.)

Landshypotek provides funding for agriculture and farming in Sweden

Landshypotek, a mutual that lends to farm and forest owners, on Friday announced that it had decided to discontinue its partnership with Moody’s, which alongside Fitch and S&P has rated Landshypotek’s unsecured funding.

Björn Ordell, finance and accounting manager at Landshypotek, told The Covered Bond Report that the mutual has been rated by three rating agencies for several years, but that during this period it had always strived for an “optimum mix” of two ratings of the issuer and two ratings of its covered bonds.

Landshypotek is 80% funded by covered bonds, he added, meaning that the covered bond rating is the most important for the issuer. In its latest interim report Landshypotek noted that unsecured funding comprises a small percentage of total borrowing, and that it believes that ratings from two agencies are sufficient.

Moody’s downgraded Landshypotek from A3 to Baa2 as part of rating actions on five Swedish banking groups in May, while Fitch and S&P rate the issuer A+ and A, respectively.

Ordell said that Landshypotek decided to drop Moody’s because it felt that Fitch and S&P carried out a more thorough analysis of the issuer and agriculture and forestry lending in Sweden, with Moody’s rating less transparent and harder to understand.

Ordell said that with Landshypotek having dropped Moody’s from its unsecured ratings the next step for the issuer is to obtain a second rating of its covered bonds.

The issuer’s covered bonds are currently rated only by S&P, at AAA, with Landshypotek yet to decide which other rating agency should rate its covered bonds.

“It’s quite a long process to add another rating,” he said, “and it will be at least one year from now before we are at that stage.”

Outstanding Landshypotek covered bonds are 75% Swedish kronor denominated, with Norwegian kroner and Swiss franc issuance making up the bulk of its overseas covered bond funding, according to Ordell.

Bankers said that broader market conditions remain challenging and fragile, with risk-aversion driven in particular by concerns about Spanish banks and sub-sovereigns. But while the Bund future continues to trade at historically elevated levels, credit indices look supportive, they said.

“I would be pretty surprised if there weren’t supply this week,” said one. “There are potential candidates.”

A syndicate official said he expects one or two euro Pfandbrief mandates to be announced and others said that an announcement of a German mortgage backed benchmark is due this afternoon. Aareal Bank and Münchener Hypothekenbank have cropped up in discussions as possible new issue candidates.

Berlin Hyp, LBBW and Deutsche Pfandbriefbank together sold Eu2bn of mortgage backed Pfandbriefe last week. Berlin Hyp priced a Eu1bn five year at 9bp over mid-swaps, LBBW a Eu500m no-grow six year at 7bp over, and pbb a Eu500m maximum seven year at 60bp over.

Strong issuers from strong jurisdictions should meet with a good reception if they come to market, said one banker, with German, Dutch, Swedish and “even” French issuers potentially fitting the bill.

Others said that the cross-currency basis swap was not in favour of euro issuance for non-euro-zone issuers such as the Swedes, with one noting that Landshypotek had earlier this week issued a new five year Swedish covered bond. The deal was for Skr2bn (Eu223m) and was priced at 87bp over mid-swaps.

Suncorp-Metway Limited has mandated Barclays, Deutsche Bank, RBC Capital Markets and UBS to lead manage an Australian dollar deal that would be the first from an Australian financial institution away from the four majors.

The maturity has yet to be finalised, but the four to five year range is under consideration, according to a syndicate banker familiar with the new issue project.

“They did a bit of work and have taken direction from some investors,” he said. “They’re looking to do something in the near future.”

A 140bp over mid-swaps level has been mentioned in connection with a new issue, which a syndicate official away from the leads said sounded “about right” given that a Suncorp deal would need to come some 30bp-40bp back of an offering from one of the big four.

Suncorp on 17 May released a US$5bn (Eu3.95bn/A$5.04bn) programme, and Fitch and Moody’s have assigned provisional triple-A ratings to a first issuance off the programme.

As reported yesterday, Clydesdale is expected to this week make its debut, in sterling.

Completing the Swedish round of its series of reviews of European banks, Moody’s cut Nordea Bank one notch from Aa2 to Aa3, Handelsbanken one notch from Aa2 to Aa3, and specialised agricultural lender Landshypotek two notches from A3 to Baa2. The ratings of SEB and Swedbank were affirmed, with all five banks now on stable outlook.

Moody’s said that, to varying degrees for each group, the rating actions were driven by: comparatively high reliance on market funding; modest profitability that could make it challenging for them to rebuild capital in the event of unexpected losses; and risks to asset quality despite robust performance to date. The rating agency nevertheless acknowledged that the Swedish economy has performed relatively well versus other EU economies, Swedish banks have been able to attract market funding on economic terms from international investors, and that Swedish banks have strengthened capitalisation since 2008.

The rating agency also said that the banks’ reliance on wholesale funding has two mitigating factors that limit its concerns.

“First, these banks have remained successful in accessing capital markets on economic terms so far,” it said. “Second, Moody’s believes that Swedish covered bonds, an important funding source for Swedish banks, are less volatile than, for example, short term unsecured market funds, due to the market’s long track record and a strong domestic investor base with few asset alternatives.”

The rating agency also said that the maturities of Swedish covered bonds largely match those of the assets they fund, minimising refinancing risk, compared with other markets, notably Denmark

“Moreover, the structure of the Swedish covered bond market has been stable for some time,” it said. “And while Swedish house prices have risen steadily over a long period, Moody’s notes the absence of a significant buy-to-let or speculative investor segment, as seen in other countries.”

Covered bonds also helped mitigate the extent of Moody’s rating action on DNB Bank, which was cut from Aa3 to A1. Regarding DNB’s wholesale funding, Moody’s said that several factors were mitigants in preventing a larger downgrade.

“In addition to the generally strong demand from domestic pension funds and others for securities denominated in Norwegian kroner, Moody’s believes that the rapidly developing Norwegian covered bond market has the potential to provide a funding source that is typically less confidence sensitive than other wholesale market sources,” it said.

“Moody’s also notes that DNB has increased the maturity profile of its funding and maintains adequate liquidity buffers, limiting its funding risk in the short term.”

Giving the reasons for its downgrade, Moody’s had noted that market funding represents around 40% of DNB’s total funding (excluding interbank funds, which are largely deposited with central banks), while the bank has exposure to asset classes such as commercial real estate and shipping. It also said that DNB’s relatively diversified earnings will come under pressure from higher liquidity requirements and weaker revenue raising opportunities.

Moody’s said that the magnitude of the downgrade was limited by several mitigating factors.

“Specifically, Moody’s recognises the banks’ relatively resilient asset quality and profitability metrics, partly reflecting its more stable domestic economic environment, its increased capital and liquidity buffers, as well as our assessment of a very high probability of systemic support.

“As a result, DNB’s A1 rating positions it at the high end of Moody’s European banking ratings.”