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On July 12, Transport for London opened books on its first public benchmark bond since 2006, taking advantage of a heightened appetite for sterling-denominated paper, following a mid-summer supply lull.
The borrower had already hosted a roadshow, via leads Deutsche Bank, Goldman Sachs and HSBC earlier in the year, but was adamant that it wanted to wait until the market was ready to offer cheaper funding than was available via the Treasury’s Public Works Loan Board – at the time offering loans at a flat rate of Gilts plus 100bp.
June and early July witnessed a resurgence in secondary market liquidity and – keen to beat competing supply out of the blocks – TfL took the plunge with a 30-year offering in benchmark size.
Investors referenced comps like Deutsche Bahn’s 10-year bond that priced at Gilts plus 110bp and was at that time trading at 90bp, and the Greater London Authority’s 2034 bond, issued at Gilts plus 80bp in July 2011 and trading at 105bp/110bp at the announcement of the new TfL bond.
Based on these, bookrunners set initial price thoughts in the area of Gilts plus 100bp, reflecting the ceiling at which the borrower was prepared to issue.
Orders grew steadily, enabling the spread to be tightened and later fixed at 98bp over Gilts for a £500m issue, without any significant drops in the orders or participating accounts.
Leads highlighted that aside from Network Rail, rated Aa1/AAA, TfL’s bond had been the only one to price below the 100bp over Gilts re-offer level in 12 months.
“This made the pricing a watershed moment for all comparably rated issuers – whose secondary bonds have re-priced inside that level in the aftermath of the TfL issue,” said Elis Wyn Jones, executive director and origination official at Goldman Sachs.
The final book for the deal topped £750m and leads said that it contained all the major accounts in the UK real money universe.
This supported the new bonds in the immediate aftermarket, where they outperformed comparable supply. At the time of writing they were bid at approximately Gilts plus 68bp, 30bp through reoffer.
The PWLB, an agency of the UK Treasury, had historically been the lender of last resort for TfL but by returning to capital markets, TfL proved that it could diversify its debt portfolio and access better levels of funding than its peers in the UK local authority sector. TfL is an executive body of the Greater London Authority.
Fuelled by the success of its 30-year, the issuer staged a speedy return to the market just three weeks later with a 10-year £500m offering that printed at 88bp over Gilts, on the back of a £1bn book.
Even when the UK government decided to lower PWLB rates in early November, TfL was able to return to market with a third fixed-rate deal paying less than it would have had it funded via the PWLB.
The government dropped PWLB rates to Gilts plus 80bp; TfL raised £300m five-year paper at Gilts plus 70bp, the tight end of 70bp–75bp guidance, on the strength of £450m of orders.
In retrospect, the success TfL has had in establishing a sterling curve in just a matter of months, and its future access to cheap alternative sources of funding, hinged on the success of its 30-year market re-entry deal.