Nationwide has flown the flag for the UK in the covered bond market this year, launching a ground-breaking £1bn 10 year FRN and last week the first 20 year UK euro benchmark. Krishan Hirani, head of secured funding at the building society, discussed the issuer’s strategy with The CBR.

Nationwide has been the only UK financial institution active in covered bonds this year. What is it about your strategy that explains this presence, most recently with the €500m 20 year deal?

It’s important for Nationwide to remain active in wholesale markets, despite the availability of central bank funding. While we have a strong liquidity position, we feel that the current opportunity in the market is one that we would look to take advantage of, and – particularly with the two recent transactions – a prudent thing for us to do when it comes to providing long term stability to the cost and maturity profile of our liabilities. Our mutual business model allows us to take a long term view of the balance sheet, which is in the best interest of our members.

You bought back around £2bn of covered bonds in September. When you did that, was it with a view to freeing up capacity for such new issuance, or was that just something that became possible as a result?

The two projects weren’t linked, the buyback was executed for standalone reasons but no expectation of issuance activity thereafter. But clearly there are positive links between the two – as you say, it freed up capacity in terms of investor lines, and the impact on pricing helped the new issue and the level we’ve been able to achieve.

Why did you feel it was the right time for the 20 year euro covered bond?

Krishan Hirani, Nationwide

While nobody from the UK has ever looked at the 20 year tenor before, Nationwide has been active with 15 year transactions in the past, so we are comfortable issuing long dated euro covered bonds. We see the euro covered bond market as a cost effective way to extend our maturity profile in comparison to many of the other funding tools that we have at our disposal. At the moment, the cost of issuing 20 years versus 15 years is flat on an all-in basis, so from our perspective it made absolute sense to extend duration at the same cost. The investor base does become narrower as you extend along the curve, but the yield pick-up for investors made this transaction an attractive proposition for them, too.

Were you surprised at just how well it went?

You can never be overly confident when it comes to launching transactions, particularly in an untested market, but two factors gave us confidence ahead of announcing this deal.

Firstly, from an investor relations point of view, we’ve been doing a lot of work keeping in touch with the European investor base throughout the Brexit period. So we felt we had good dialogue with European investors and that we knew what they were broadly thinking when it came to their views on the UK. That was very important in terms of giving us the confidence to not only look at a euro-denominated transaction, but also in this particular part of the curve.

Secondly, we’d seen strong demand for other recent long dated transactions, even if they were from different jurisdictions, and good secondary performance, too.

In terms of how it went on the day, I think it’s fair to say it did beat expectations. We weren’t expecting an order book north of €2.3bn – that was definitely a positive surprise for us, and gave us a strong platform to price the deal at a level inside the theoretical fair value. I think the reception we received is testament to Nationwide’s investor relations work, our standing in the market, but also the positivity and technicals in covereds at the moment – the lack of supply in particular is a factor playing into that.

You mentioned Brexit – have you found there are accounts saying, sorry, we are not interested anymore? Is it a topic you need to clarify much on?

Clearly through the uncertainty of the last two or three years, there were a number of European investors who had paused UK investments, but this isn’t the case anymore. The dynamic has certainly shifted as we now have clarity on the Brexit deal and the impact going forward for the UK and Europe. The majority of those investors who had paused given the uncertainty now have the clarity that they need to make a decision on UK investments. And this was evidenced in our deal, with the vast majority (98%) of demand coming from continental Europe, with a mix of investor types.

Looking back to your previous benchmark, the £1bn 10 year FRN, that was also a novel transaction. Ten year FRNs in general are rare, let alone a UK or sterling covered bond.

The sterling covered bond market is Nationwide’s home market – it’s our cheapest to deliver wholesale funding platform. Typically, it is a short term market, three to five year transactions are the norm, and in 2020 we saw the first seven year deal priced in this format. But, very much aligned to what we’ve been thinking about in euros, we saw the opportunity this year to look to extend that even further. For Nationwide, we are looking to avoid any concentration around our TFSME maturities, and other maturities that we have across the funding and capital stack. So taking that opportunity to push out maturity options in covered bonds even further is something that we’ve been keen to do, and this year we had the opportunity to look to do that in sterling, and the results from our point of view were spectacular. Hopefully that’s something we can build on going forward. What we’ve done in euros is very similar, it’s been the same strategic aim in both of those markets, looking to push the boundaries in terms of the tenors available, but at the same time being able to issue at historically tight levels.

What is it that made the longer dated sterling FRN possible? Investors willing to go further along the curve, or a different investor base?

A combination of the two. Traditionally the investor base in the sterling floating covered market has been dominated by bank treasuries. Pushing the tenors out beyond five years, you naturally lose some of that interest, although what we have seen is many bank treasuries continuing to participate along the curve. But for the 10 year product you would typically expect to see more asset manager demand and even some pension demand, and that was what we had in our transaction, a good mix of bank treasuries (56%), asset managers (32%) and pension funds (12%).

Will we see further covered bond issuance from you this year?

Despite the recent activity, our funding requirements are expected to remain modest compared to a typical funding year for Nationwide – this is mainly due to availability of TFSME and also the society’s strong retail performance. As always, funding requirements are closely monitored, and additional requirements could materialise and/or we could look at pre-funding opportunities later in the year across secured and unsecured formats.