Nationwide Building Society attracted over Eu1.6bn of orders to a Eu1bn seven year covered bond today (Thursday), with the deal deemed another encouraging sign for UK debt post-Brexit, although a mooted 15 year tranche did not materialise after investor and issuer expectations did not match up.

Nationwide announced a mandate this morning for a euro benchmark seven year covered bond, via leads HSBC, Lloyds, Nomura and Société Générale, and said it would also consider a 15 year tranche by reverse enquiry.

Books for the seven year issue were opened with guidance of the 14bp over mid-swaps area. After two hours, guidance was revised to the 12bp area with books in excess of Eu1.6bn, for an expected deal size of Eu1bn. The spread was then fixed at 11bp and the size at Eu1bn.

“It’s a very good result, and I think it reflects that investors believe that no matter what happens with Brexit, they are still safe with a product like this,” said a banker away from the deal. “If you compare this to recent trades like BNPP’s long seven year yesterday, priced at minus 3bp, Nationwide’s deal is so much more attractive.

“I don’t see any reason why you would not sink your teeth into this.”

The 15 year tranche did not emerge, and a banker at one of the leads said Nationwide had decided against launching the tranche.

“Indications shown seemed more reflective of external factors than the fair value of Nationwide Building Society’s covered bonds,” he said.

Bankers away from the leads said the move should not be interpreted negatively.

“I don’t view this as a bad thing,” said another banker away from the deal. “They got the seven year done and very solidly oversubscribed, and it looks like they just decided that there wasn’t enough interest in the 15 year at the price they wanted.”

The new issue is only the fourth benchmark covered bond from a UK issuer since the Brexit referendum last June and only the second denominated in euros, following a Eu500m seven year issue for Coventry Building Society on 5 January. In the run-up to and aftermath of the vote, UK covered bond spreads widened beyond those from countries such as Canada and Australia, and issuers’ funding needs were reduced by the launch of the Bank of England’s Term Funding Scheme (TFS) in August.

Nationwide’s last benchmark covered bond was a £750m three year floating rate note in April 2016, and its last euro issue a Eu1.25bn short five year issue last February.

“There’s not been much UK supply coming and there’s not much expected, but it’s still reassuring to see that appetite for UK assets is still very high, and in particular that continental European investors are still keen to buy euro-denominated UK assets,” said a syndicate banker. “All in all it’s a good signal.”

The seven year deal was seen as offering a new issue premium of around 3bp-4bp, with bankers seeing Nationwide’s October 2021s at 1bp, mid, October 2021s at 3.5bp, and March 2027s at 13.5bp. They also cited Coventry Building Society’s recent January 2024 issue at 13bp, mid, noting that Nationwide’s outstandings trade around 6bp inside Coventry’s at the shorter end of the curve.

“That’s a pretty good, small premium for a UK name, if you consider the Brexit factor,” said a banker away from the leads.

Bankers estimated that a new seven year euro benchmark for a Canadian issuer would have today been priced around 8bp tighter than Nationwide’s deal, noting this differential has decreased from the peak of post-Brexit widening, when UK covered bond spreads were some 15bp back of Canadian spreads. The last euro benchmark from Canada was a Eu1.25bn five year for Bank of Nova Scotia on 9 January, which was priced at 4bp and seen trading at minus 3bp, mid.

“I think that differential will tighten further over time, simply because supply expectations for from Canada are much higher than the UK,” added one. “The UK used to trade 5bp inside the Canadians, so maybe they will be able to claw their way back to those levels.”