Yorkshire Building Society took over Eu1.3bn of orders for a Eu500m six year covered bond today (Monday), tightening the spread 5bp after a cautious start while still offering a “prudent” premium, while the demand was deemed proof investors remain comfortable with UK debt as Brexit progresses.

The new issue is the first benchmark covered bond from the UK since its government triggered Article 50 last Wednesday to officially begin the process of leaving the EU.

Yorkshire Building Society (YBS) announced a mandate for the Eu500m (£424m) no-grow six year issue on Friday, after completing a four day European roadshow.

Leads HSBC, Lloyds Bank, UBS and UniCredit launched the deal this morning with guidance of the 15bp over mid-swaps area. Guidance was later revised to the 12bp area on the back of books above Eu1bn, before the spread was fixed at 10bp with books above Eu1.3bn.

“It’s a strong outcome,” said a banker away from the deal. “10bp is the tightest spread for a UK issuer for some time, and a Eu1.3bn-plus book is very respectable.”

The deal is the tightest euro benchmark covered from a UK issuer since September 2015, when Lloyds Bank priced a Eu1.25bn seven year issue at 10bp.

It is only the third euro benchmark covered bond from the jurisdiction since the Brexit referendum last June and the launch of the Bank of England’s related Term Funding Scheme (TFS) in September – following a Eu500m seven year for Coventry Building Society on 5 January and a Eu1bn seven year for Nationwide Building Society on 16 February.

“The Brexit discussion has progressed since the last UK supply, but clearly covered bond investors are still not overly concerned,” said a syndicate banker. “There may have been more headlines over the weekend, but the market is used to it.

“In the end, the lack of supply from the UK since the launch of the TFS probably helped them a lot.”

Another banker said that such political risks are unlikely to have an impact on the primary market while conditions remain so supportive for issuance.

“In this market, I struggle to think of any headline that would cause problems for any of today’s trades,” he said.

Yorkshire’s deal was deemed to have offered a new issue premium of around 3bp, with bankers citing Yorkshire November 2022s at 5.5bp, mid, pre-announcement. They also saw Nationwide Building Society October 2022s at minus 0.5bp, Lloyds Bank April 2023s at 2bp, Coventry Building Society January 2024s at 11.5bp and Nationwide February 2024s at 5.5bp.

“To tighten the spread by 5bp is quite a lot, relatively speaking,” said a syndicate banker away from the leads. “We’ve seen a few deals in the last few weeks that have been managed in a similarly cautious approach, with the leads starting generously then bringing down the spread when they’ve got the books.

“In this case, Yorkshire have still left something on the table, so I don’t think 5bp is necessarily too much of a move.”

On Thursday, a Eu1bn five year issue for Westpac NZ was priced at 7bp, down from initial guidance of the 12bp area, while on 21 March a Eu1.25bn five year National Australia Bank issue was priced at 2bp, down from guidance of the 8bp area.

Another banker away from the leads agreed that the pricing was fair.

“I think they could have gone even tighter, given how some recent deals have been nailed flat to fair value curves,” he added. “Yorkshire tend to be quite prudent in terms of pricing, preferring not to overstretch it, and they were again today.”

The new issue is Yorkshire’s first benchmark covered bond since November 2015, when it sold a Eu500m 10 year.

Photo: Jay Allen/The Prime Minister’s Office/Flickr; Copyright: Crown Copyright