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Strategy Sweden: Introduction Of SWH191

Published 01/17/2017, 07:30 AM

Starting on Tuesday, 17 January (depending on market conditions) Swedbank Hypotek will start introducing a new loan (SE0007525654) that matures on 15 June 2022 and will become the longest benchmark loan issued by Swedbank Hypotek. The coupon rate is set at 1%. Swedbank Hypotek plans to quickly reach benchmark size (minimum SEK3bn).

There are already a number of covered bonds by other issuers in the same 2022 segment, reducing pricing uncertainty. 2017 has so far been a good year for credits in general, with strong initial investor demand. Thus, we would expect Swedbank Hypotek’s new loan to be well received. Moreover, the relative pricing in EUR-denominated covered bonds by Swedish issuers clearly remains attractive (we have seen three benchmark issues already in 2017 by Swedish issuers), perhaps putting downside risk to our supply forecas ts.

Pricing

We assume that all curves are correctly priced and that the new loan will in due time reach benchmark volumes. We use mid market prices as of January 16 at 10.00. Looking at matched and true ASW curves, pricing currently seems mostly driven by matched maturity pricing. This of course bothers us to some extent, but it is mostly an issue for old loans with off-market coupons and should thus not be a problem for SWH191. Rather we think reasonable pricing would be an almost linear extrapolation on the matched maturity curve, consistent with bonds issued by Stadshypotek and Nordea Hypotek.

This would mean SWH191 trading 22.5-23.5 bps above SWH190. In the charts below we have assumed a spread of 23 bps. This implies a ZC spread against the government curve of around 87 bps, see chart below.

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