Lloyds Bank returned to the Sonia-linked market for a £750m three year covered bond today (Monday) after having opened the new FRN sector to financial institutions with a similar deal in September, and ahead of a parliamentary vote on the UK government’s Brexit withdrawal agreement on Tuesday of next week.

The UK lender issued an earlier £750m (EUR837m) three year covered bond on 5 September that opened for UK financial institutions issuance linked to the Sonia rate that is replacing Libor as a benchmark in sterling bond markets. Today’s deal now takes Lloyds’ Sonia-linked issuance beyond the end-2021 date by which Libor will be phased out.

Lead managers Barclays, HSBC, Lloyds and RBC went out with guidance of the Sonia plus 60bp area for a benchmark-sized sterling issue this morning, and after around two and three-quarter hours fixed the pricing at 60bp on the back of around £800m of demand, and orders ultimately exceeded £800m, excluding joint lead manager interest.

A syndicate banker at one of the leads noted that the settlement date of the new issue, 14 January, was chosen to match the maturity date of a £750m covered bond coming due next Monday, and he said this benefited the issuer as there was some appetite among investors to roll over their investment.

He said Lloyds’ previous, September 2021 Sonia-linked three year was trading at 50bp-51bp over, implying fair value for the new issue in the low 50s, meaning the issuer had paid a new issue premium of 6bp-7bp.

“That’s not too bad,” he said, “with Lloyds being a relatively recent and frequent issuer.”

He noted that the level of 60bp compares with a margin of 75bp paid by Nationwide Building Society on a £1bn five year Sonia-linked issue on Thursday, with the saving proving an incentive to opt for the shorter maturity.

“The steepness of the curve is indicative of a lot of demand for short dated assets,” he said, noting that investors are particularly keen to find such instruments in sterling against the volatile Brexit backdrop.

The deal is the first in the Sonia-linked sector from a UK financial institution to have intra-day execution, the lead banker noted.

“That is testament to the fact that Sonia is becoming a little bit more run of the mill for issuers and investors alike,” he said, “which makes it even more appealing to folk trying to minimise execution risk.

“Other issuers will be happy to see the three year part of the Sonia curve open,” he added.

Nationwide’s sterling deal was almost entirely placed with UK accounts and Lloyds’ distribution was similar, according to the lead banker, who said it was unsurprising, although Lloyds attracted a couple of non-UK accounts.

He said the pricing was inside what would be achievable for Lloyds in dollars and euros, being equivalent to around mid-swaps plus 10bp in euros, where Lloyds 2022 paper trades at around 25bp, mid, in the secondary market – implying a saving of some 15bp before taking into account any new issue premium in euros – and equivalent to around dollar Libor plus the low 30s, while a Lloyds three year dollar covered bond might come at 40bp-45bp over.