Lloyds Bank highlighted the negative net UK supply likely in the wake of the BoE’s TFSME facility when on Tuesday it launched a tender for an unspecified amount of around £16bn of covered bonds across euros, sterling and dollars, triggering tightening of as much as 10bp in some UK issues.

The UK issuer is tendering for eight euro issues – all but one of its benchmarks in the currency, two US dollar benchmarks, and six FRNs and one fixed rate benchmark in sterling, including its most recent benchmark in any currency, a £1bn (€1.12bn) three year Sonia-linked deal issued on 27 January. All but two of the issues have five years or less remaining until maturity.

See below for full list of bonds included in the tender offer.

UK financial institutions had been expected to increase their covered bond issuance this year as they looked to refinance funding drawn under the Bank of England Term Funding Scheme (TFS) launched in 2016. However, at a special meeting on 10 March the central bank’s monetary policy committee decided to introduce a new TFS with additional incentives for SMEs (TFSME) in light of the Covid-19 pandemic.

The access to such funding led to a downward revision in UK issuance expectations, and a covered bond banker said that Lloyds’ move underlines the trend.

“The key message here is that they have access to this TFSME facility, which gives you four year funding and is going to be open for a year, and if you are getting something around the base rate, you don’t necessarily need this other funding,” he said.

Lloyds’ euro covered bonds tightened on average 4bp in the wake of the tender announcement to be quoted roughly in line with the offer purchase levels, while a syndicate banker said some UK covered bonds had tightened as much as 10bp on Tuesday. Lloyds’ March 2025 paper is being tendered for at 20bp over mid-swaps, for example, and its September 2029s at 32bp.

Lloyds has not said how much of the covered bonds it will purchase.

On the same day the covered bond tender was launched, it announced that it had accepted all bonds tendered in buybacks of eight unsecured bonds: around $2.1bn of five dollar issues totalling $4.9bn, £36m of a £250m sterling issue, and €506m of two euro issues. Four of the dollar issues had been subject to an earlier tender at the turn of March-April, with just $336m tendered at the prevailing wider levels. Lloyds has also bought back Canadian dollar senior paper and US dollar capital securities in the interim.

The new tender runs until next Thursday (28 May).

“The offeror is making the offers in order to provide the holders of the covered bonds with an opportunity to have their covered bonds repurchased,” said Lloyds’ announcement on Tuesday, “while maintaining a prudent approach to the management of Lloyds Bank plc’s funding and liquidity base.”

The covered bond banker suggested investors might welcome the opportunity to tender their bonds given the lack of liquidity in the secondary market and given the premium to where the bonds had been trading.

Lloyds’ tender is believed to be the first for covered bonds in three years, while previous tenders have typically either been in relation to wind-down situations or connected to issuers switching from hard to soft bullet structures.

Source: Lloyds Bank, The CBR