Santander UK sold a rare dual currency covered bond today (Tuesday), comprising its first SONIA-linked covered bond, a £1bn three year that brought more new investors into the new segment, and a EUR1bn five year that paid a “pragmatic” elevated premium pre-Brexit.

The sterling deal comes shortly after Lloyds Bank inaugurated the SONIA-linked sterling covered bond segment with a £750m three year issue on Wednesday. The euro deal is meanwhile the first euro benchmark covered bond from the UK since May.

Following a mandate announcement yesterday (Monday) afternoon, the sterling tranche of Santander UK’s deal was launched this morning by leads Deutsche, NatWest, RBC, Santander and TD with guidance of the SONIA plus 45bp area.

The euro tranche was at the same time launched by HSBC, LBBW, Natixis, Santander and UBS with guidance of the mid-swaps plus 12bp area.

After around one hour, the leads announced the books were over £500m and EUR500m, respectively. Just under two hours after launch, they announced the books were over £1bn, including £125m joint lead manager interest, and EUR1bn, excluding JLM interest.

The spread of the sterling tranche was subsequently set at 43bp and the size at £1bn with books at £1.25bn, including the £125m JLM interest. The final book stood at over £1.2bn, excluding JLMs.

The spread of the euro tranche was set at 10bp and the size at EUR1bn, with books approaching EUR1.5bn, excluding JLM interest. The final book stood at over EUR1.6bn, excluding JLMs.

The deal’s combined size of EUR2.12bn equivalent makes it the largest in the covered bond space since May 2017, when Rabobank sold a EUR2.5bn dual tranche deal.

“It’s pretty unusual to see a dual tranche, dual currency execution in the covered space, but it was a very good outcome here in that both tranches generated strong demand,” said a syndicate banker that worked on one of the tranches.

A syndicate banker away from the leads agreed.

“Taking EUR1bn and £1bn out of the covered bond market is a pretty good day at the office,” he said.

Lloyds’ debut SONIA deal last week was only the second benchmark bond linked to SONIA since the rate was put forward by the Bank of England as a replacement for Libor. It followed a £1bn five year FRN for the European Investment Bank (EIB) that pioneered the structure in June.

As with the deals that preceded it, the coupon of Santander UK’s deal will be determined by compounding the backwards-looking SONIA daily, rather than by using Libor, which will be phased out of the sterling bond market by 2022.

Lloyds’ £750m three year issue was also priced at 43bp over SONIA down from initial guidance of the 45bp area, on the back of more than £1.4bn of orders.

“It’s interesting that Santander priced the deal at the same spread as the Lloyds trade – which I think is a good endorsement of the Santander UK credit – and were also able to get the larger deal size,” said a syndicate banker at one of the sterling leads. “I think that shows that market capacity is developing as more people get more comfortable with the notion that SONIA instruments aren’t going to have any different characteristics in terms of size or trading volume or liquidity compared with the Libor notes.

“We saw more new investors get engaged this time around that hadn’t participated in a SONIA transaction before.”

Syndicate bankers said the deal offered a 2bp concession at most for the new structure, estimating that an equivalent Libor-linked trade for Santander UK would have been priced at around 25bp-27bp over three month Libor and noting that the basis swap between SONIA and three month Libor was around 16bp.

In contrast, the euro tranche was deemed by bankers to have paid a new issue premium of 7bp-8bp, based on the mid side of Santander UK’s curve, which they noted is more than most recent deals.

Syndicate bankers away from the leads said the approach was pragmatic and reflected that euro-denominated deals from UK banks have met mixed receptions over recent months, with Brexit looming.

“I think there is a recognition that deals from UK names maybe need to be a bit more of a no-brainer investment from the get-go if you’re going to generate sufficient levels of enthusiasm to have the option of printing a decent size,” said one.

Bankers said demand for the euro tranche was also supported by a recent lack of euro-denominated issuance from the UK. Only three euro benchmark covered bonds have been sold by UK issuers this year – totalling EUR2.5bn supply. Santander UK’s last euro benchmark covered bond was a EUR1bn seven year on 4 January.