Yorkshire Building Society sold the first UK benchmark covered bond since February on Tuesday, a blow-out €500m seven year, with the issuer keen to de-risk its future exit from central bank funding and maintain investor engagement, director of treasury Duncan Asker told The CBR.

Like banks across other countries, UK financial institutions have taken advantage of plentiful and attractive funding options from their central bank. This has led not only to UK financial institutions refraining from issuing covered bonds since February, but also a series of buybacks of covered bonds and senior instruments.

Yorkshire’s decision to issue a euro benchmark covered bond therefore took some market participants by surprise.

Duncan Asker, directory of treasury at Yorkshire Building Society, said its move was driven by two main interrelated considerations.

“Everybody is cognisant of the cost-benefit of taking on government funding, and we’re no different to that,” he said, “so we’ve got some £2.9bn of TFS (Term Funding Scheme) outstanding, and we’re going to swap that out into TFSME (Term Funding Scheme with additional incentives for SMEs), as and when that fits with the maturity of TFS. We have already drawn £450m of TFSME earlier in the year, but we don’t want to be reliant on government funding when it comes to repay that.

“Our strategy is therefore to ensure that when we get to the final contractual maturity date of TFSME, we’re not in a position where it’s a structural component of the YBS funding programme – we want to have effectively de-risked its refinancing. And the way we see to do that is to continue with our commitment to the wholesale markets that we’ve had over a number of years.”

This means continuing regular issuance across the main wholesale markets Yorkshire has been active in, namely RMBS, covered bonds and senior preferred, according to Asker.

“That will ensure that we maintain our good engagement with investors through regular issuance across those markets,” he said, “and that’s still our intention.”

The management of Yorkshire’s funding profile also played into the choice of the seven year maturity, well beyond the end of the window in which TFSME may be refinanced, according to Asker, and in turn the desire for a longer maturity explains why Yorkshire opted for euros.

“It was really a conversation around where we thought the best technical support would be,” he said. “Making sure that we could deliver on the seven year term was what sold me on euros in the end.

“And as I said, our intention is to continue with our programme of regular issuance subject to market conditions, trying to cover all currencies as well as all markets across the three programmes (RMBS, covered bonds and senior preferred).”

Yorkshire’s last euro benchmark covered bond was a €500m (£455m) five year deal in April 2019, while its last sterling covered bond was a £750m five year FRN in November 2019.

The new euro benchmark came shortly after Yorkshire on 10 September sold a €500m senior preferred bond. That was launched in conjunction with a buyback of €250m of a €750m March 2022 senior preferred bond, with investors having the option of switching from the old benchmark into the new.

“The tender was capped at €250m to maintain a benchmark size in the market,” said Asker, “but at the same time, to do a new five year deal. This again reflects our strategy of making sure we’re active in the market, and also extending the maturity, pushing that out to five years and spreading our maturities a little better.”

The exercise also made sure Yorkshire had appropriate levels of senior preferred outstanding to meet rating agency requirements.

Yorkshire’s brace of euro benchmarks were issued into post-summer conditions that have proven benign for issuers.

“I wanted to make sure that we got both those deals done this year,” said Asker, “and saw that there was a relatively small window between the usual year-end issues that you have around doing anything, but also the kind of levels of uncertainty that we’re seeing around Covid and also US elections and Brexit. So our take was, actually let’s look at this window, and try and get the deals done before we see that uncertainty ramping up even more.”

For Tuesday’s covered bond, leads Danske, HSBC, Natixis and UniCredit built a book for the €500m no-grow seven year that peaked above €3bn and totalled more than €2.5bn at the final pricing of 22bp over mid-swaps. The strength of demand had enabled them to tighten pricing from initial price thoughts of the 28bp area, with the re-offer spread deemed around flat to 1bp through fair value.

“It was very well executed and we are very satisfied with the outcome,” said Asker. “It was really good to see the level of investor engagement. We had done quite a lot of investor work in the run-up to it, through our half year update, the roadshow work we did on the senior preferred, and then some calls we did on Monday specifically to support the covered bond.

“The success of this trade probably demonstrates the value of that investment in terms of investor relations that we’ve done. And I feel Yorkshire has a proven track record of keeping the investor base engaged with its regular issuance across markets.”

He noted that the new issue had tightened in the secondary market by 1bp-2bp.

“That’s nice from an investor perspective,” said Asker. “We should be issuing deals that are good for our ourselves and for our investors, and I believe this covered bond delivered that.”