CBA priced a £350m four year FRN today (Friday), showing sterling to be of interest to non-UK issuers even if it was modest compared with recent UK deals. Euro benchmark activity was meanwhile muted, although Commerzbank is planning meetings related to its SME programme.

The Australian issuer’s deal comes after Lloyds reopened the sterling market with a £1bn three year floating rate note on 7 January and Abbey National Treasury Services sold a £750m three year FRN on Monday. Lloyds’ issue was priced with a re-offer margin of 30bp over Libor and Abbey’s at 35bp.

Leads CBA, RBC and RBS priced Commonwealth Bank of Australia’s £350m (A$649m, Eu420m) deal at 35bp over mid-swaps. A syndicate official at one of the leads said that they went about pricing the issue by looking at senior unsecured-covered bond differentials, with CBA peer National Australia Bank (NAB) having an August 2016 covered bond at 27bp over and a November 2016 senior unsecured deal at 45bp. He said that the closest CBA senior unsecured bond, a July 2016 FRN, was at 44bp/41bp, and that factoring in the senior-covered differential of NAB, around 15bp, put a two and a half year CBA covered bond at around the high 20s. With the curve from two and a half years to four years worth around 5bp, this meant that, at 35bp, the new four year covered bond came at close to fair value, he said.

The syndicate official said that this was testament to sterling investors becoming increasingly comfortable with the asset class. He also noted that the deal played into a trend of investors in the product being increasingly real money accounts at the expense of bank treasuries, with real money appetite for FRNs also a contributory factor.

The order book was close to £400m, with mainly UK demand, according to the syndicate official, meaning that CBA could size the transaction at £350m after having initially targeted a £300m deal. However, he acknowledged that the deal highlighted the difference in demand between FRNs from UK banks that are Bank of England eligible and can garner £1bn-plus books, and those that are not. He nevertheless considered CBA’s £350m deal to be a decent benchmark size and the transaction overall to have been a good result for the bank.

He said that the level achieved by CBA was “there or thereabouts” when compared with what could be achieved in other markets, such as US dollars, noting that the increasing competitiveness of sterling funding partly explained the recent uptick in activity in the currency, with arbitrage having been less favourable last year.

A syndicate official away from the leads noted that the level of 35bp over three month sterling Libor was equivalent to around six month Euribor plus 16bp. CBA’s last deal was a Eu1bn five year fixed rate benchmark priced on 9 January and he said that this meant that fair value for a new four year euro benchmark would be around 10bp over mid-swaps, meaning that the Australian bank had paid up a little to issue in sterling, although the lead syndicate banker suggested that a new four year issue might come at 14bp over.

The other syndicate banker nevertheless said that the sterling floater was a reasonable move, particularly given that the market for core names in euros had been weaker this week, with new issue premiums rising.

He said that core issuers were “not thrilled” about this development and might therefore think twice about issuing in euros. Another noted that there were not publicly announced mandates for next week and that, while he expects there to be further supply with markets open, the number of potential issuers is also dwindling as banks enter blackout periods.

However, a banker said that with a Eu1bn 10 year tranche of a UniCredit dual tranche covered bond having had “a pretty great outcome” on Wednesday, a lot of peripheral names were trying to work out how what they might be able to achieve.

Commerzbank is meanwhile planning to meet with investors for an update on its SME-backed structured covered bond programme. With the issuer having mandated banks – Commerzbank, Crédit Agricole, Credit Suisse and Deutsche Bank – for the exercise and only having issued once – a Eu500m five year last February – off its programme, bankers are expecting the German issuer to be eyeing a new issue.