Lloyds attracted over Eu1.6bn of demand for a Eu1.25bn five year covered bond today (Monday), with a relatively generous price to reflect Brexit concerns on UK spreads. ASB Finance is due tomorrow, while Leeds Building Society could debut after a roadshow.

Lloyds Bank’s new issue is only the second benchmark covered bond from the UK since the date of the referendum on the UK’s membership of the EU was in February set for 23 June. Nationwide was the first, selling a Eu1.25bn short five year issue on 25 February, and bankers said at the time that the risk of the UK’s exit (dubbed Brexit) was not yet priced in to the market.

Bankers said that spread movements in the weeks since suggest that investors’ concerns had begun to have more of an impact on the market, with UK covered bond spreads mostly unmoved while those of other jurisdictions tightened in the wake of the announcement of new ECB measures last month.

“It’s not so much that they’ve widened, but UK spreads have clearly underperformed relative to other covereds,” said one. “However, the lack of movement is probably also a function of people waiting for new UK supply.

“It doesn’t take genius insight to guess that the UK names are going to want to tap the market in the coming months.”

Lloyds Bank leads Crédit Agricole, Danske, Lloyds, LBBW and RBC launched the seven year issue this morning with initial price thoughts of the 30bp over mid-swaps area. The deal was then re-offered at 28bp with the books over Eu1.35bn, before the size was fixed at Eu1.25bn, with the book closing at over Eu1.6bn.

“It’s a strong signal,” said a syndicate official at one of the leads. “There are just below 100 accounts in the book, and that is a great result, especially given that Lloyds also did a Eu1.5bn five year in January.

“For the issuer, it is a good result.”

Syndicate officials at and away from the leads said the deal offered a new issue premium of 5bp-6bp, seeing Nationwide’s January 2021s at 17bp-18bp, mid, and September 2022s at 19bp.

They noted this premium was higher than those offered by recent core covered bond issues before the Easter break.

“In relative terms it looks slightly cheap, because most other jurisdictions have outperformed the UK, so there is a little premium there for Brexit already priced in,” said the lead syndicate official. “I don’t think they really paid up on the trade, because the 5-ish premium isn’t much more than other names would pay for a similar size.

“The secondary curve is where the real premium for Brexit lies.”

Syndicate officials away from the leads agreed.

“It is a fairly conservative price, but not too far out of line,” said one. “This has gone smoothly, although perhaps a deal from a comparable, non-UK name with the same premium would have got a more enthusiastic response.”

Bankers said further covered bond supply from the UK is likely to follow, ahead of the referendum.

“Some of the UK issuers have been active in the senior market at the HoldCo level, but there is also room for more UK issuers in the covered bond market,” said one. “That applies also to the smaller names – if they come with Eu500m sized-deals, you would not expect them to have any problems.”

Leeds Building Society today announced a mandate for a series of European investor meetings commencing on Thursday ahead of a potential debut euro-denominated benchmark covered bond. Danske, HSBC, Natixis, UBS and UniCredit have the mandate.

ASB Finance this morning announced a mandate for a euro-denominated benchmark covered bond and is today holding a global investor call. Commonwealth Bank of Australia (CBA), DZ, HSBC and UBS have the mandate.

A syndicate official at one of the leads said the deal will be launched tomorrow, subject to market conditions.

The deal will be the first euro benchmark covered bond from the New Zealand issuer since October 2013. ASB Finance is owned and guaranteed by ASB Bank Limited, a subsidiary of CBA.

The last benchmark covered bond from New Zealand was a Eu500m 2020 issue for Westpac NZ in September.

KA Finanz, the wind-down entity of Kommunalkredit Austria, also indicated that it will return to the covered bond market in its 2015 annual report, published on Friday.

The Austrian issuer said it that it has sufficient potential for new capital market issues following the transfer of Eu3.7bn of cover pool eligible assets and of Eu2.7bn of covered bond liabilities from Kommunalkredit Austria (KA Old). It added that the fact the covered bonds have been rated AA- by S&P “further strengthens KF’s position”.

KA Finanz said that it will “continue to rely on covered bonds for long-term funding”, depending on market developments.

Syndicate officials said that further covered bond supply will emerge this week, but said many issuers will prefer the senior unsecured market given strong market conditions, noting that Credit Suisse, SBAB and Leaseplan were today active in the asset class.

“I would expect the bulk of supply to be skewed towards senior this week,” said one. “Covered bonds have been the safe haven while things have been tricky, so now it makes sense for issuers to access the senior market while they can.”

Another banker agreed.

“I think the market would like to see more covered supply – whether it will see much is another question,” he said. “We’ve seen that the market has been well-bid, but I wouldn’t expect a huge flow of issuance straight off the bat this week.

“However, I think there will be a few motivated issuers out there that want to get one more euro trade done before going into blackout periods, so we should have some more activity at least.”