BayernLB sold a £200m two year FRN yesterday (Wednesday), its first public sterling covered bond since 2007, after conducive market conditions allowing for “respectable” funding levels caught the bank’s attention. Meanwhile, a Swede is said by some to be eyeing euros.

According to Stefan Hauser, first vice president, funding execution at Bayerische Landesbank, the issuer has natural sterling funding needs, but had only been active in private placements in sterling since launching a £300m two year floating rate public sector Pfandbrief in 2007. However, a combination of factors lured the issuer to return to the public sterling market, said Hauser.

“It was evident that the market for sterling issuance, especially in the short dated floating rate note format, is very receptive and that it is possible to achieve respectable refinancing spreads,” he said. “Everything pointed to a conducive environment to launch a deal, and those expectations were confirmed.”

A lead order gave the issuer and sole lead RBS additional confidence to go ahead and launch a deal, according to Hauser.

More than £200m of orders were placed for the £200m no-grow two year mortgage deal, for which RBS went out with guidance of 20bp over three month Libor, where the issue was priced.

The re-offer spread is in line to where BayernLB would have sold a two year mortgage Pfandbrief in euros, according to Hauser, although this was not a focus for the issuer.

“The point wasn’t to achieve a precision landing in terms of theoretical euro equivalent levels,” he said, “but to price at a decent level in sterling to satisfy original funding needs in the currency.

“We’re satisfied – absolutely.”

The 20bp over re-offer spread compares with pricing of 23bp over for a £250m three year FRN that Sweden’s Stadshypotek issued on Monday, with UniCredit analysts noting that the spread difference between a BayernLB two year deal and Stadshypotek three year in euros would be around 14bp.

“This confirms our long-standing view that non-domestic markets usually provide better relative value,” they said. “The crux is that hardly any investor is able to trade cross currencies and absorb the price inconsistencies.”

BayernLB’s deal is the third public sterling covered bond this year, with Australia’s ANZ Banking Group having opened the market on 24 January. Stadshypotek’s deal was the first Nordic sterling covered bond.

The deals preceding BayernLB’s were encouraging, said Hauser.

“It was clear that a market is forming, and that there is investor interest in financials in sterling at levels that from an issuer’s perspective are a lot better than last year,” he said. “That definitely sharpened our attention.”

RBS analysts today (Thursday) said that they expect sterling covered bond issuance to reach £9bn-£11bn this year, driven mainly by non-domestic supply as UK banks stay on the sidelines due to cheaper funding available via a UK government Funding for Lending Scheme (FLS). In 2012 UK banks contributed 87% of sterling covered bond supply, they said.

“However, whilst we forecast that the share of domestic supply will drop this year,” they said, “we do not expect the UK issuers to completely ignore growing covered bond investor base in the UK and still see about £4bn-£6bn of domestic supply.”

Euro benchmark issuance, meanwhile, has been at a standstill for more than two weeks, with a Eu1bn five year mortgage jumbo for Berlin-Hannoversche Hypothekenbank on 29 January the last deal to have hit the market.

Syndicate bankers said the euro pipeline was thin, but some mentioned that a Nordic issuer was looking at the market, with Skandinaviska Enskilda Banken (SEB) mentioned in this context. Swedish issuers have been absent from the euro benchmark covered bond market since March last year, as their domestic market has been offering better funding levels, with some banks also tapping the US and Australian dollar markets in 2012.

A syndicate banker said that he had heard SEB was looking at the market, but that he had not had the impression this was imminent.

Another said that the Swedish krona-euro cross-currency basis swap had widened to around 20bp from 15bp two weeks ago, but that it has been a long time since it was this attractive for Swedish issuers looking at euros.

A DCM banker said that the euro covered bond market looks relatively expensive compared with the Swedish krona market at present given recent widening of the cross-currency basis swap curve and tightening of domestic spreads.

“We may need to wait a bit longer before we’ll see covered bond supply from Swedish banks in the euro market,” he said, “but given how long most have been absent it’s only a question of time now.”