Abbey priced the first euro covered bond benchmark for a UK issuer since February 2012 yesterday (Tuesday), a deal that Santander UK had earmarked for Q4 and turned its attention to after completing a recent Tier 2 transaction and having otherwise prioritised the senior unsecured market this year, according to an official at the issuer.

The Abbey National Treasury Services transaction was a Eu1bn (£839m) seven year UK Regulated Covered Bond that leads Credit Suisse, HSBC, Santander, UBS and UniCredit priced at 21bp over mid-swaps. Nearly Eu1.6bn of orders were placed for the bonds, which were initially marketed at the low to mid-20s and then at guidance of the 23bp over area.

“We’re very pleased with the transaction,” said Tom Ranger, head of funding at Santander UK, the issuer’s parent. “It was a great return for us in the euro covered bond market and hopefully a great return for UK issuers, too.”

Santander offices, London

The last new UK euro benchmark covered bond before Abbey’s deal was a Eu2bn five year for Barclays Bank in February 2012. Abbey’s last euro covered bond had been a Eu1bn five year in September 2011.

Ranger said that a euro covered bond had always been part of the issuer’s funding strategy for 2013, but that the bank first concentrated on the senior unsecured market as a segment of the wholesale funding markets from which Santander UK had been absent for a longer time.

“We’ve had a very clear funding strategy this year to keep connected with those markets where we’ve been active, which historically has been covered bonds and ABS, and to re-connect with those markets where we haven’t been so active but wanted to be,” he said.

Santander UK has raised funding in the senior unsecured market twice this year, in euros and US dollars, and also sold an ABS. Completion of a $1.5bn 5% 10 year Tier 2 subordinated debt offering on 31 October paved the way for the issuer to turn its attention to its plans for a fourth quarter euro covered bond, said Ranger.

“The Tier 2 deal was very important for us as it was the first time that Santander UK issued subordinated debt since 2005,” he said. “Once that was done we looked at covered bonds and have been assessing different maturities.

“We felt that the best value for us as issuer and for investors was to look at the seven year part of the curve.”

Abbey’s deal is the tightest euro covered bond from a UK issuer since the financial crisis, noted a lead syndicate banker. The issuer “leveraged its rarity cachet” and proceeded with the transaction despite a busy new issue pipeline, and has completed its funding plan for 2013/started prefunding for 2014, he added.

Commerzbank was in the euro benchmark covered bond market alongside Abbey yesterday (see separate story) and several senior unsecured deals were being marketed.

Demand from Germany and Austria was “particularly strong”, taking 49% of the bonds, according to the lead syndicate banker, who also highlighted a “notable” 10% share of allocations for central banks and official institutions.

Further allocations went to UK and Ireland with 18%, Asia 7%, the Benelux 6%, France 6%, the Nordics 5%, Switzerland 5%, Italy 3%, and others 1%. Fund managers were allocated 51%, bank portfolios 23%, insurance companies and pension funds 15%.

In July 2012 HM Treasury and the Bank of England introduced a Funding for Lending Scheme (FLS), intended to boost lending to the real economy, and this has frequently been cited as contributing to keeping UK issuers away from public bond markets. Abbey, however, has only drawn some £100m under the scheme and Ranger attributed a dip in wholesale funding volumes to lower wholesale funding requirements.

“UK banks are very liquid and in a very strong place after having gone through a big adjustment a few years ago, so this year has been more of a normalisation,” he said. “I expect new issuance volumes next year will go back to a cross between 2013 and 2012 volumes.”