Nationwide launched the first benchmark covered bond of the year today (Friday), a successful £1bn five year Sonia-linked trade. The euro market is expected to reopen on Tuesday, even if heightened geopolitical risks may have given some issuers pause for thought.

Nationwide Building Society leads HSBC, Lloyds, NatWest and Santander this morning went out with guidance of the Sonia plus 60bp area for the sterling benchmark-sized trade. After around an hour and a half, books were reported as being over £1.3bn, excluding joint lead manager interest, and after close to two and a half hours guidance was revised to 55bp-57bp, will price in range, and the maximum size set at £1bn (€1.18bn) on the back of over £2bn of demand, including £50m JLM interest. The spread was ultimately set at 55bp and the size at £1bn, on the back of over £2.1bn demand, pre-reconciliation.

A syndicate banker at one of the leads said the deal was a “standout trade” in reopening the market for covered bonds and in particular indicating strong demand for sterling assets.

“It’s great to see sterling open the primary market this year,” he said. “A £2bn-plus book shows that there’s a lot of people trying to get these assets now that we’ve been through the election, and Nationwide have now given them the chance to do that.”

He saw fair value at around 55bp based on the issuer’s outstanding 2024s, Yorkshire Building Society and Santander UK 2026s, and Lloyds 2024s trading in a range of 55bp-56bp.

“To get an order book of that size and price bang on fair value shows the secondary market was a bit stale,” he added. “It’s quite a nice strong message from that issuer, so I absolutely expect follow-on demand for this trade.”

The lead banker said that given the deal was in floating format, it was protected from rates moves that followed a US drone strike that killed a top Iranian general, and further bolstered by leads’ work with UK accounts in the past 24 hours.

“We absolutely took a view on it,” he added, “but it did not affect the trade given where we priced and the order book we developed.”

A syndicate banker away from the leads said the trade demonstrated that, in spite of the troubling developments in the global sphere, covered bonds could still be successfully launched.

However, he said issuers considering euro-denominated activity had likely been given pause for thought.

“From those we were speaking to, they would rather play it safe,” he said, “with the developments in the Middle East putting them off, which is understandable given the US strike did not appease an already tense situation.”

He said the news may have delayed announcements for trades commencing early next week, with syndicate bankers having expected the market to fully re-open on Tuesday after public holidays in parts of Europe on Monday, or even trades planned for today (Friday).

“Bund yields are down,” he added, “which is what you’d expect as a sort of standard reaction, given that markets are probably nervous and still thin in terms of turnover.”

He suggested that while US-Iran relations had clearly deteriorated severely, the news was not entirely surprising in light of events in the past two years, and that the market might therefore be expected to recover.

“If it weren’t for the fact it was 3 January and a Friday,” he added, “we may have seen other transactions hit the screens today. But issuers are taking a step back and waiting, and it’s the end of the week, so why should they rush?”

Another syndicate banker said that issuers are typically more cautious in the New Year and therefore no new euro benchmarks will come until at least Tuesday, when the whole market has returned from the holiday break.

“With the whole of the funding year ahead of them, issuers want to make sure the first one works,” he said, “so it doesn’t make sense for anything to happen ahead of next Tuesday when some parts of Germany are back from their extended weekend.”

Photo: Iranian commander Qasem Soleimani; Credit: Wikimedia Commons