Coventry Building Society made a successful Eu500m comeback on 5 January as a “relationship trade” aimed at European investors in spite of cheaper UK alternatives, according to head of capital markets Kris Gozra, and with the impact of both UK and Italian referendums having to be negotiated.

The Eu500m (£425m) deal on 5 January was Coventry’s first euro benchmark covered bond since October 2014, while the issuer’s last benchmark was a £500m three year FRN in March 2015.

Kris Gozra, head of capital markets at Coventry Building Society, told The CBR that the issuer began preparing its comeback having decided that it was “long overdue” a return to the market.

After taking part in meetings with market participants in Germany in September, to discuss the future of the UK market in light of Brexit, Coventry Building Society then held a European roadshow ahead of a potential euro benchmark issue at the end of November. However, the transaction was postponed as market conditions worsened into the end of the year.

“We looked at getting a deal away in 2016, but what happened then was the Italian referendum,” Gozra said. “Given the reaction to the referendum, and with a noticeable slowdown in CBPP3 purchases spooking some people in the lead up to the referendum, we decided not to go that side of Christmas.”

After markets opened positively at the start of the year, Coventry was encouraged to push forward, he said. The issuer announced a mandate for a Eu500m no-grow seven year covered bond on the second day of market activity, 4 January, and hit the market the next day.

“Having done the roadshow we were confident, but it’s fair to say that the trade wasn’t without risk,” Gozra said. “Until we went for it, there was no way of knowing how many investors could do a UK name and how many couldn’t – there would definitely be some names who’d bought into us before who wouldn’t this time around, the question was how many.

“What we found in the end is we had a pretty healthy reception.”

Leads Commerzbank, Danske, HSBC and Natixis priced the deal on 5 January at 18bp over mid-swaps, down from initial guidance of the 20bp area, on the back of over Eu950m of orders.

Some 64 investors were in the final book, with banks allocated 39% of the deal, asset managers 34%, central banks and official institutions 21%, insurance companies and pension funds 5%, and others 1%. Accounts from Germany and Austria took 38%, the Nordics 22%, the UK and Ireland 12%, Asia 10%, France 8%, the Netherlands 6%, and Switzerland 4%.

“Even when it became obvious we would be the first UK issuer back in the market, we felt we were a good candidate – being a well-regarded credit with stable ratings, a good credit story, and a very well understood, simple business model,” Gozra added. “The strength of the order book proved that this was the case.”

Coventry’s deal was the first UK euro-denominated benchmark since the Brexit vote in June, with the last previous having been a Eu500m four year issue for Leeds Building Society in April.

After some frontloading of supply at the start of 2016, UK issuance activity wound down in the run up to the country’s EU referendum on 23 June. The uncertainty that followed the vote to leave then kept many issuers quiet, then the Bank of England announced its related Term Funding Scheme (TFS) in August. The TFS, which allows banks to borrow reserves in exchange for eligible collateral, reduced UK issuers’ funding needs and further stymied supply.

Prior to Coventry’s return, only one benchmark covered bond in any format had been sold out of the UK after the Brexit vote – a £500m three year for Santander UK in July – and none since the launch of the TFS.

“In a way, the TFS is almost tailor-made for a name like ourselves,” Gozra said, “because Coventry Building Society grows on average 10% per year and with that kind of growth you can get a considerable allowance under the TFS.

“We decided, however, that there was no way we could just be absent from the wholesale markets, as we’d worked quite hard to build up a franchise. When you have that franchise people expect you to return to the markets on a semi-regular basis, and you need to maintain your investor community and credit lines.”

Gozra added that the all in cost of an equivalent sterling covered bond would have been “considerably cheaper” for Coventry, but said a euro benchmark was more appropriate for such a “relationship trade” aimed at European investors.

“We could have priced the deal tighter than we did, too,” he added, “but as we saw this as a relationship trade, not a funding trade, that would have been counterproductive. This deal was always about sending a message.”

Gozra expects Coventry Building Society to return to the covered bond market in the next 12-18 months.

“Some of our wholesale issuance will inevitably be displaced by the TFS,” he said, “but I’d expect us to be back in the wholesale markets again soon, be it in the euro market or the sterling market, if the market opportunity exists.”