An inaugural SONIA-linked £750m three year covered bond for Lloyds yesterday (Wednesday) was prudent and confronted the “reality” of the transition from Libor, an official at the issuer told The CBR, highlighting strong demand as a sign of investor confidence.

The deal is the first benchmark bond from a financial institution to be linked to the Sterling Overnight Index Average (SONIA) since the Bank of England put SONIA forward as the replacement for Libor in sterling bond markets, and subsequently reformed and strengthened the rate in April.

It follows a pioneering £1bn five year FRN for the European Investment Bank (EIB) in June, which was the first SONIA-linked benchmark issuance since 2010 and was the result of over a year of preparatory work.

The two deals have been described as key stepping stones in the sterling market’s transition away from the controversy-hit Libor benchmark, which is to be phased out by 2022.

After updating its prospectus to allow for SONIA-based issuance, Lloyds announced a mandate for the debut deal on Monday afternoon and – with leads Lloyds, HSBC, RBC and TD – gathered IOIs and investor feedback on technical aspects of the deal on Tuesday.

Peter Green, head of public senior funding and covered bonds at Lloyds Banking Group, said Lloyds had decided to issue the inaugural SONIA-linked bond as it is a frequent issuer in the sterling bond market and the benchmark transition “is a reality for all market participants”.

He added that the issuer chose a covered bond specifically because for most issuers – away from SSAs – the most liquid sterling floating rate market tends to be the covered bond market.

“On this basis, the choice of covered bonds was an easy one to make,” he said. “It is a market that appeals to a broad range of investors, including bank treasuries, asset managers, central banks and pension funds.”

Lloyds Bank’s deal replicates the structure used by EIB, with the coupon determined by compounding SONIA daily.

“Given the nature of the SONIA market conventions, the coupon is not known until the end of the coupon period – whereas Libor coupons are known at the start of the coupon period,” said Green. “Otherwise, the other terms of the trade are identical to Libor notes.”

The deal was launched on Wednesday morning with guidance of the SONIA plus 45bp area. After around one hour and 30 minutes the leads announced that books had surpassed £1bn. The spread was subsequently set at 43bp and the size at £750m (EUR832m) with books over £1.2bn, excluding joint lead manager interest. The final book stood at over £1.4bn.

Accounts in the UK and Ireland were allocated 95% of the deal and Europe 5%. Banks took 70%, asset managers and pension funds 25%, and central banks and official institutions 5%.

“We are proud to be first bank to trade a SONIA-linked bond,” said Green. “We had strong investor demand for the trade from bank treasury and asset managers, across UK and Europe, which shows confidence in both the bank, its strategy and also interest in this new product.

“This is a prudent way to fund the group and to meet the Bank of England’s new regulatory objectives.”