Santander UK surpassed expectations last Tuesday as it secured one of the largest UK covered bonds of recent years, a £1.5bn Sonia-linked four-year.
The deal was Santander UK's first benchmark covered bond issuance since it sold a £1bn seven-year Sonia-linked trade in February 2020.
UK banks have made only limited forays into the covered bond market since the coronavirus pandemic led the Bank of England to extend cheap funding to lenders via its Term Funding Scheme. In 2021, UK covered issuance in sterling amounted to just £1.5bn, comprising two deals, while prior to Santander UK's return only £1.1bn had been issued in 2022, across two deals from Yorkshire Building Society and Clydesdale Bank.
"We were very positive going into it that a UK issuer would be met with a higher level of demand relative to some of the other recent non-UK sterling covered bond transactions because of the comparative lack of supply over the course of the last couple of years," said a banker at one of Santander UK's leads.
"We were all expecting a bigger book and more investors and that was definitely the case, but we were all positively surprised by the size of the order book."
The deal was priced at 43bp over Sonia, down from initial guidance of the 45bp area, through NatWest Markets, RBC, Santander and Standard Chartered. The book closed above £1.6bn.
Using recent Sonia-linked covered supply for reference points, bankers saw fair value for the deal in the high 30s to 40bp context, translating to a concession of at least 3bp.
Bankers said the deal was priced flat to if not inside the level Santander UK could have achieved with an equivalent euro denominated transaction.