Bank of Nova Scotia sold the first fixed rate benchmark covered bond in the sterling market since March 2015 today (Wednesday), printing a £500m five year issue that impressed bankers with its size, although some noted that sterling funding levels are not as compelling for international issuers as alternatives.

Sterling covered bond supply has been limited in recent months after a succession of eight deals between January and April, when no new benchmark supply emerged until Santander UK reopened the market on 1 July, a week after the UK’s Brexit vote, with a £500m three year FRN.

Bank of Nova Scotia leads Barclays, Credit Suisse, Lloyds and Scotiabank launched the BNS five year fixed rate issue with guidance of the 65bp over Gilts area, before re-offering the deal at 63bp and fixing the size at £500m (Eu597m, C$861m).

The new issue is the first fixed rate benchmark covered bond in the sterling market since March 2015, when Lloyds priced a £500m March 2022 issue.

“It’s a broadly interesting deal, in terms of seeing that the reopening of the sterling market post-Brexit is now drifting into fixed rate covered bonds too,” said a syndicate banker away from the leads. “It’s not a bad move, because historically you’ve seen demand for sterling covered bonds quite disparate between the UK names and the non-UK names.

“But in fixed rate format you should get a bit of a blend of investor appetite, which could mean there isn’t as much of a distinction drawn between the UK and non-UK names as in the shorter dated FRN market.”

Another syndicate banker agreed.

“They’ve done well as a non-UK issuer to take £500m out of the market,” he said. “That’s not easy to do.”

Of the six new benchmark sterling FRNs launched by non-UK issuers so far this year, only one was sized £500m and none were larger.

Some bankers away from the deal said sterling-denominated funding does not look as attractive as some of the alternatives available to BNS.

“What is a little puzzling is that the level of 65bp over Gilts is equivalent to spreads of mid-60s in US dollars and mid-single digits in euros, which looks pretty wide relative to where these guys are trading in those markets,” said a syndicate banker away from the leads.

He noted BNS five year US dollar covered bonds are trading in the mid-50s while their euro five years are trading at around minus 2bp.

“Either they’ve started at 65bp with a view to going quite materially tighter,” he said, “or maybe they’re prepared to pay up a bit for sterling, seeing it as an important strategic market to enter.”