Santander UK issued the first seven year Sonia covered bond today (Tuesday), a £1bn FRN that attracted over £1.8bn of demand, as part of a dual-tranche deal also comprising a US$1.25bn three year fixed rate transaction that is the first covered bond to reference SOFR in its documentation.

After yesterday (Monday) announcing plans to launch both sterling and dollar benchmarks, leads Credit Suisse, HSBC, RBC, Santander and TD this morning went out with guidance of the mid-swaps plus 30bp area for the three year fixed rate dollar tranche, and Sonia plus 60bp for the seven year floating rate sterling tranche. The three year was ultimately priced at 28bp over mid-swaps and sized at $1.25bn (£956m, €1.13bn) on the back of over $1.7bn of demand, excluding JLM interest, and the seven year was priced at 55bp over Sonia and sized at £1bn (€1.18bn), on the back of over £1.8bn of demand, excluding JLM interest.

A syndicate banker away from the leads said the issuer had opted for an “interesting combination” of tranches, the seven year sterling tranche being an extension of recent five year maturities.

“When it came to what the right curve is between a five year and seven year,” he said, “it’s an interesting discovery process, though I think the IPTs were spot on.

“It’s a good test for that part of the curve,” he added, “and it’s going to set an interesting precedent for borrowers going forward who might be looking to diversify by extending their Sonia curve.”

A syndicate banker at one of the leads said the seven year sterling tranche went particularly well, its £1.8bn showing it to be a viable benchmark maturity for the Sonia market.

“As the first seven year Sonia,” he said, “this is a groundbreaking transaction and natural evolution and progression of the Sonia market.”

Another syndicate banker said questions over how many investors would extend this far down the curve had been answered clearly, given the success of the trade.

“It speaks to the ample liquidity in seven year,” he said.

Santander was able to achieve pricing on its seven year flat to where Nationwide Building Society issued a five year on 3 January, noted the lead banker, while with the three year dollar achieving funding close to where it could issue in sterling.

The dollar tranche is the first covered bond to include reference to the Secured Overnight Financing Rate (SOFR) that is replacing dollar Libor in parallel with the transition from sterling Libor to Sonia in the sterling market. Although the new issue is in fixed rate format, the coupon in the soft bullet extension periods is floating rate and for the first time in a dollar covered bond is linked to SOFR.

“We didn’t have any meaningful pushback on that,” said the lead banker, “so Santander UK has confirmed that SOFR back-ends absolutely work on covered bonds.”

The dollar issue is also Santander UK’s first covered bond issue in 144A format.