Lloyds Bank became the latest financial issuer to demonstrate the depth of the sterling covered bond market on Tuesday, printing a £1.25bn five-year FRN that was the biggest in the format for a UK issuer since January.
A small flurry of issuance has hit the currency over the last three weeks with £3.85bn raised in the format from domestic and foreign issuers, generally demonstrating the market's depth. With the ink just dried on a much wider print for the Toronto-Dominion Bank the day before, leads Lloyds, BMO Capital Markets, BNP Paribas, HSBC and Santander opened books at guidance of 55bp area over Sonia.
"Sterling covereds are working well, especially for UK banks," a banker on the deal said. "You're getting a 20bp tighter pricing versus Canadians. If they did a dollar deal, they'd pay Canadian prices. If they did a euro deal, they'd pay something similar to the Canadians too."
With demand peaking at £1.65bn-plus, leads tightened pricing to 50bp over, which is where the trade priced.
One banker away questioned the initial marketing level given that Nationwide Building Society had priced a £750m transaction in the same tenor at 48bp over, less than a week ago.
"It didn't make sense to me. It's not like the market got worse," he said before the final terms and size were released. "Yes there was the TD deal which was a lot wider but if you're going to value the Lloyds, which you should do from a UK regulatory treatment perspective, materially tighter than an international name, then whether you're 2bp or 15bp tighter isn't going to materially change things."
He did add however that the order book looked impressive and that he could see the logic of the starting level if Lloyds wanted to land a large transaction.
"There's a lot of supply going on in covereds, in sterling and dollars, it's great to see markets other than euros working," he said. "That Lloyds deal was incredibly tight versus where they could have done anything in other markets."
Another lead manager put fair value at 45bp and that the question had been how much Lloyds would have to come back of Nationwide to get a big size done.
"We started at 55bp so the best we hoped for was a 50bp print," he said adding that 52bp was the base case. "We were hoping to get to 50bp but also wanted the size. We got an extra £500m over Nationwide and printed at 50bp, so that’s very pleasing."
Don't push too far
Pushing pricing too far could have been a risky strategy given the level of sensitivity. In the case of Nationwide, books dropped from £1.4bn-plus to £975m after the level was revised from 53bp area to 48bp.
Books also dropped for Lloyds, from £1.65bn-plus to a final £1.4bn-plus.
"The aim and objective of Nationwide was price, price, price and they wanted to price through RMBS and into the 40s," the lead manager said.
"In our case, it was clear that we didn't want a £750m deal, the target was £1bn to the plus, and the threshold based on the feedback after Nationwide that through 50bp we would get lots of drops and sensitivity. If we had gone to 48bp, could we have printed £1bn, maybe, but it would have been a bit of jam job."
Investors would have had one eye on where Lloyds had priced its most recent securitisation too. A £1bn five-year RMBS priced in May came at 52bp over Sonia.
"You could say it's an example of: at 50bp, they're pricing through that RMBS they priced a few weeks ago which is restoring that natural sense of order between those asset classes," the banker away said.