Lloyds Banking Group launched a tender offer for three short dated covered bonds yesterday (Tuesday), two of which – issued by Bank of Scotland – were included in a similar liability management exercise carried out by the UK group in November.

The targeted covered bonds are a Bank of Scotland (BOS) £500m (Eu617m) December 2014 floating rate note and a Eu2bn 4.75% January 2015 issue, and a Lloyds Bank Eu1.5bn 3.37% March 2015 transaction.

Lloyds said that by tendering for the bonds it “intends to manage its overall wholesale funding position and better optimise its stock of outstanding debt securities whilst maintaining a prudent approach to liquidity”.

Stephan Dorner, covered bond analyst at Crédit Agricole, said that the rationale is the same as that for a buyback Lloyds carried out in November.

“Lloyds Group is rather using its own covered bond programme for new issuance in the market and by tendering it is also optimising its wholesale funding profile,” he said.

The Bank of Scotland issues were already partly repurchased as part of the November liability management exercise – £110.35m worth of the FRN remains outstanding and Eu854.32m of the Eu2bn January 2015 issue.

Maureen Schuller, head of covered bond strategy at ING, noted that the Bank of Scotland and Lloyds Bank euro covered bonds have already dropped out of the iBoxx indices on maturity grounds so that any reduction in their size to below Eu500m would not be relevant from an index inclusion standpoint.

The repurchase yield has been set at 0bp over the 3.75% January 2015 Bund for the Bank of Scotland euro issue and 0bp over the 2.5% February 2015 OBL for the Lloyds March 2015 bond. For the Bank of Scotland sterling FRN, the purchase price is £1,000.39 per £1,000 in aggregate principal amount.

Schuller said that spreads on the targeted euro issues narrowed by around 3bp yesterday.

Citi and Lloyds are the dealer managers. The tender offer ends on 3 June, although Lloyds stated that the deadline could be earlier.