Royal Bank of Scotland sold the second sterling covered bond benchmark of the year on Tuesday, a £1bn (Eu1.21bn) 12 year deal after Barclays entered the market last week with a £1bn 10 year issue.

“We were looking at the market potential in sterling because after having done some euro issues we felt it was time to do sterling,” Stephen Hynes, head of secured funding at RBS, told The Covered Bond Report.

The issuer has had a covered bond programme since June 2010.

Leads BNP Paribas, JP Morgan, Lloyds, RBC and RBS priced the issue at 275bp over Gilts.

“Pricing was in line with initial guidance and the bonds are trading 5bp tighter this morning,” said Jez Walsh, global head of covered bond syndicate at RBS, yesterday (Wednesday). “That suggests we got the pricing spot on.”

It trade was trading at 266bp over Gilts today (Thursday), about 9bp tighter.

Walsh noted the Barclays transaction was the most recent sterling denominated bond and a good starting point for pricing.

“RBS usually trades about 50bp back of Barclays in euros,” he said. “Barclays had softened a little to about 220bp/225bp over from 215bp over in the secondary market.

“It’s priced within that context.”

Hynes said RBS was very pleased with the pricing.

“In a new market you want to get the momentum in terms of entering,” he added. “The bond has performed, and that performance is very important.”

Bookbuilding was seen to have gone well, with orders of about £1.5bn on the transaction by closing at 1200 London time.

“We were pleased by the pace of bookbuilding,” Monika Tarr, manager of term funding and capital raising at RBS. “Within one hour we had £700m of IoIs, and when we opened books at 1030 London time we had £1bn in orders just a few minutes after opening books.”

The issuer had been looking at a 10 year or longer maturity before it settled on a 12 year.

“We thought the 12 year sweet spot was the best, based on investor feedback” said Hynes.

RBS had conducted investor meetings last week ahead of launching the deal.

“The roadshow was very well received,” said Walsh. “The feedback – as is typical in a sterling transaction – was that investors’ preference is for a longer transaction.”

Tarr said the roadshow allowed RBS to gauge interest.

“Investors told us they liked our name,” she said. “It suited them from an asset allocation view.”

RBS has no immediate plans for another sterling covered bond but has not ruled it out, according to Hynes.

“We guided £15bn of term funding for 2012 in our Q3 2011 results announcement, based primarily on secured funding and private markets,” he said. “On the secured side, we will look to optimise across our covered bonds, RMBS, and credit card ABS.”

The book comprised almost entirely UK accounts, with 95%, while Germany took 4%, and others 1%. Asset managers were allocated 80%, insurance companies 16%, banks 3%, and pension funds 1%.

“Accounts expect more supply in the UK market,” said Walsh.