Abbey National Treasury Services is today (Wednesday) launching a £1.5bn dual tranche sterling covered bond that includes the longest issue in the currency since February last year alongside a three year floating rate note that has proven to be a popular choice.

Santander offices, London

The deal is split into a £750m 17 year fixed rate issue and a £750m three year floating rate note. The 17 year tranche will be priced at 245bp over Gilts, the tight end of guidance of the 250bp over area, while the three year floating rate note will be priced at 165bp over three month Libor, the tight end of guidance of 165bp-170bp over.

A syndicate official at one of the leads said that about £2.5bn of orders were placed for the 17 year issue. The book on the three year floating rate tranche was said to be above £1bn.

Barclays Capital, BNP Paribas, RBS, and Santander are lead managing the three year floating rate issue, with Lloyds and UBS joining them to execute the 17 year issue.

The transaction is the eighth sterling covered bond benchmark this year, of which four have been three year floating rate notes. The 17 year fixed rate tranche is the longest sterling covered bond since Lloyds TSB Bank in February last year sold a £1.25bn 18 year issue, at 175bp over Gilts.

A syndicate official away from the leads said that the issuer had made a smart decision to go with a three year floater, which preceding supply has shown to work well, and to go for duration with a second tranche that will fit well from the perspective of the issuer’s mortgage lending business.

“The curve is relatively flat for Abbey,” he said, adding that it dips slightly beyond 15 years to provide Abbey with a slightly better yield via a 17 year issue.

By pricing its three year floating rate note at 165bp over three month Libor Abbey is coming flat to Coventry Building Society in that segment, which the syndicate official said seemed appropriate. Coventry on Friday sold a £500m three year floater at 165bp over.

Another syndicate official away from the leads said that his bank had last week indicated a slightly wider spread to the issuer for a 17 year issue, and that he had heard of “differing opinions” among investors with respect to the 250bp level.

He said that the leads had capped the long dated tranche at £750m and that if this was not the maximum that the issuer wanted to raise from the outset then it was possibly a tactic employed by the leads in response to “varied” investor feedback to entice demand and lend the deal an element of scarcity value.

The spread on the 17 year tranche is “on the skinnier side of premiums”, he said, adding that new issue concessions had generally shrunk in the covered bond market and that sterling investors would be cognisant of this.

He said that Abbey 2026s were trading at around 235bp, and that the move down the curve to a 2029 maturity would not necessitate much additional spread.

Abbey last tapped the covered bond benchmark market with a new issue at the beginning of September, selling a Eu1bn five year at 150bp over mid-swaps.