Nationwide Building Society opened UK financials issuance for 2019 with a £1bn five year Sonia-linked FRN covered bond today (Thursday), upsizing its transaction against a backdrop of Brexit uncertainty that is nevertheless less febrile then when TSB pulled a similar deal in mid-November.

The UK building society announced the mandate for its new issue yesterday, with Lloyds, NatWest, RBC and TD as leads. The deal is the first bond from a UK financial institution in any format this year.

“We are in an interesting spot around sterling execution,” said a syndicate banker at one of the leads. “The UK folks reverting to sterling transactions is probably a function of the fact that perhaps there’s a sense that UK sterling investors are kind of invested into the UK macroeconomic, Brexit and sterling risk anyway. Therefore they are probably the least likely to be hesitant compared with investors in alternative markets.

“So sterling covered bond transactions are a little bit of a rainy day-type trade for the UK issuers – as are secured markets generally for bank issuers. And therefore it’s not particularly surprising to see UK names here in the same way you are seeing European focus on covered bond issuance for the majority of transactions we’ve seen in the past couple of days.”

He said the mandate announcement received a positive response, and the leads went out with initial guidance of Sonia plus 77bp for a benchmark-sized transaction this morning. Demand peaked at over £1.2bn, enabling pricing to be tightened to 75bp and the deal to be upsized first to £750m minimum and then to an ultimate size of £1bn (EUR1.1bn).

“That’s an extremely successful outcome for a debut Sonia deal from one of the UK names,” said the lead banker. “It’s testament to being a little bit brave in stepping into the market as the first UK financial in sterling, but sensible in offering some spread concession to be as equally appealing as other covered bond markets.”

He put the new issue premium at 5bp-7bp – similar to levels seen on euro benchmarks – with Coventry and Yorkshire Building Society November 2023 Sonia FRNs in the high 60s and shorter-dated Lloyds and Santander UK three year FRNs issued last year at around 50bp over.

“Nationwide has done a fair amount of work in getting Sonia-ready,” he added, “and we’re pleased that work has paid off today with a terrific result to open the UK financials market.”