Commonwealth Bank of Australia (CBA) issued the first seven year Sonia-linked covered bond from a non-UK financial institution today (Wednesday) and took away £400m just 1bp wider than the last UK issue, but did not tighten from initial guidance amid pushback on where value lay.

Following a mandate announcement yesterday (Tuesday), leads CBA, Deutsche, HSBC and RBC opened books this morning with initial guidance of the Sonia plus 38bp area for the November 2028 sterling benchmark, expected ratings triple-A. After three and a half hours, they reported a book of around £450m and set the spread at 38bp for an expected £400m (A$739m, €474m) size. The book closed in excess of £450m, excluding joint lead manager interest.

The deal is only the fourth seven year Sonia-linked covered bond and the first from a non-UK issuer, and a syndicate banker at one of the leads said that working out fair value for what was “quite a pioneering trade” complicated the process.

“Optically, printing at IPTs isn’t ideal,” he said. “Coming in, there were a lot of questions on how flat curves have got, whether people want to extend in this environment, particularly given that issuance is now starting to pick up.

“I guess all of that resulted in some people pushing back.”

The last seven year Sonia-linked FRN, a £500m deal for the UK’s TSB in June, was quoted around 37bp, mid, according to the lead banker, while the only 10 year Sonia-linked covered bond benchmark, a £1bn deal from Nationwide Building Society in February, was quoted around 37.5bp. He said that references including the shape of Nationwide’s fuller curve implied fair value in the mid-30s or slightly higher.

The lead banker noted that CBA priced just 1bp wider than TSB, which was re-offered at 37bp in June, despite execution not having gained the expected traction.

“It’s still a very strong print,” he said. “CBA is probably a better credit, but TSB is UK and has all the associated bells and whistles of HQLA eligibility, so for an Australian to take that money at more or less the same level is a good result.”

The sterling FRN follows a €1.25bn eight year covered bond from CBA earlier this month.

“They are now tapping into a very different market,” said the lead banker, “so I think they had their eyes on diversification and not taking every last penny. We therefore went out for a benchmark size and they were pretty open in terms of what they would take, and ultimately chose to fix the spread and see what size they could get rather than jam every last penny out of the market.”