Barclays launched the first sterling covered bond of the year today (Tuesday), a £1.25bn five year FRN that attracted some £1.8bn of demand and offered a “very sizeable” saving versus alternative currencies. Bank of Nova Scotia is set to follow with a sterling five year FRN expected tomorrow.

Barclays announced the mandate for a benchmark sterling five year FRN on Friday (29 December), with Barclays then the only lead manager named.

The deal was launched this morning by a full lead group of Barclays, Commerzbank, Lloyds, Santander, SG and UniCredit, with initial price thoughts of the three month Libor plus 27bp area. The leads later announced that books had exceeded £1bn, and subsequently set guidance at the 23bp area on the back of over £1.7bn of orders.

The spread was later fixed at 22bp and the size at £1.25bn (Eu1.4bn) on the back of £1.8bn of orders.

“It’s a good spread and a pretty sizeable volume – we haven’t seen a deal of this size for some time in the five year segment,” said a syndicate banker away from the leads. “It is therefore a good outcome.”

The new issue is the largest in sterling since Royal Bank of Scotland issued a £1.25bn three year FRN in May 2017.

Syndicate bankers said the spread of 22bp over three month Libor represented a saving of around 8bp-12bp compared to what the issuer would have been able to achieve with an equivalent deal in the euro or US dollar markets.

“There was a very sizeable benefit for them in going for sterling,” said one.

The new issue is Barclays’ first benchmark sterling covered bond since May 2017, when it sold a £1bn three year FRN. It follows a series of sterling-denominated five year FRN issues at the end of last year, including deals from domestic issuers Santander UK and TSB Bank.

UK banks are expected to be more active in the covered bond market this year, following the end of the Bank of England’s Term Funding Scheme.

“Having a UK bank come forward and print a sizeable trade in covered bond format is I think suggestive of a trend we will see throughout 2018,” said a syndicate banker. “UK banks are positioning for alternative sources of funding away from the Bank of England’s TFS.”

Bank of Nova Scotia (BNS) announced after the launch of Barclays’ trade that it has mandated Barclays, Credit Suisse and NatWest Markets to lead manage a sterling five year FRN. The deal is expected to be launched tomorrow, subject to market conditions.

Syndicate bankers said other issuers are also monitoring the sterling market and are expected to launch new issues in January.

“Liquidity in the sterling market remains very strong, driven by heavy redemptions in Q4 last year, which are still burning a hole in investors’ pockets,” said a syndicate banker. “Having a £1.25bn deal on the 3 January shows that people are still keen to put their cash to work in sterling.”