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Wednesday, 22 November 2017

Covered Bond: Nationwide’s €1.75bn five and 15-year bond

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In a year when covered bonds shone, Nationwide Building Society shone brightest of all with its rare long-dated dual-tranche jumbo, which heralded the issuer’s return to the euro covered market after more than two years away.

Certainly, Nationwide needed a strategic trade to re-engage with a broad set of real money investors and build out its curve.

“The key question was how to rejoin the covered market, making an impression with total size and split of investors, in a market that suffered from ever lower spreads,” said Armin Peter, head of European debt syndicate at UBS.

Making the deal even more impressive was the fact that it came in June, long before the ECB’s covered bond purchasing programme began to grind spreads to record lows in the tail-end of the year, thereby creating highly accommodative conditions for issuers

Although the issuer could have opted for a standalone seven-year deal, the scarcity of the 15-year maturity outside Germany encouraged it to print the dual-tranche transaction.

While the five-year maturity sat in the typical sweet spot for most FIG investors and catered to the strong demand then offered by LCR portfolios, the more unusual 15-year tranche – the first from a UK issuer of that denomination since 2007 – represented more of a risk.

Nonetheless, the longer tenor struck the right note, especially with insurance accounts, which went on to acquire 31% of the allocation. The demand was such that leads increased that tranche from €500m to €750m alongside the €1bn five-year offering – making for a larger deal than many expected and the largest dual-tranche of the year at that time.

The longer tranche found particular favour with German and Austrian investors, who accounted for 75% of the allocation.

Order books closed via leads Barclays, Citigroup, UBS and UniCredit within three hours, having exceeded €3.5bn, with the combined tranches attracting more than 170 accounts.

Spreads were set at plus 8bp and plus 31bp for the respective five and 15-year tranches, representing a negligible new issue concession and the first single-digit euro covered print from the UK since 2007.

The bonds went on to perform strongly in the secondary market, immediately closing 2bp–3bp tighter the day after pricing, and continued to tighten over the course of the year.

The bond’s success ultimately lay with the issuer’s bravery and innovation around maturity, paving the way for others to follow.

“It’s that point of being open-minded about how to do a longer-dated transaction. It was exceptional,” said Peter.

To see the digital version of the IFR Review of the Year, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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