Barclays Bank UK dusted off its covered bond programme this week to reopen UK and sterling issuance after recent turmoil in UK markets, and Barclays’ Fiona Chan told The CBR the £500m five year FRN exceeded expectations and should offer encouragement to its compatriots.

The new issue is Barclays’ first benchmark covered bond since May 2019, when it sold a £500m May 2023 floating rate note.

Chan, head of capital markets execution at Barclays Bank UK, noted that Barclays Bank UK has been running surplus liquidity – its LCR level was 182% at the end of the third quarter – and said its reduced wholesale funding needs are behind its absence from the market since May 2019. However, with the macroeconomic backdrop changing, the issuer is positioning itself to be more active.

“Looking ahead, we’re anticipating a slowdown in deposit growth,” said Chan, “and as over 80% of the BUK entity is funded by retail deposits, we are expecting a funding gap to materialise. Rather than waiting until the year we need the funding, we thought we’d start now, slow and steadily.

“We also have two tranches of TFSME refinancing coming up over the next two years,” she added. “So the combination of these two factors gives rise to a need to access the covered bond market again.”

This provided Barclays with a welcome opportunity for the issuer and the covered bond market to become reacquainted, according to Chan, and also reaffirm its market access.

As well as marking Barclays’ return to the covered bond market, the benchmark is the first sterling covered bond since the turmoil in UK financial markets sparked by former prime minister Liz Truss’s brief administration. Barclays filed an update to its covered bond programme in August, but had to wait longer than anticipated to issue.

“Unfortunately, covered bond spreads have more than doubled since February when the war broke out,” said Chan (pictured), “and with spreads rising, it didn’t help that the mini-budget disrupted the market and stopped us targeting a new issuance window in September.”

The issuer was then in blackout ahead of announcing its third quarter results on 26 October. In the meantime, UK financial markets recovered, with Chan citing the success of a Clydesdale Bank (Virgin Money) Lanark RMBS on 25 October as a positive signal. Barclays also on Monday successfully raised £1bn of Tier 2 at the HoldCo level on the back of a £3.65bn order book.

“A combination of all those points encouraged us to then announce the mandate on Tuesday and collect interest from investors,” said Chan. “We opted for a one-and-a-half day execution strategy as we are conscious of the fact that we hadn’t really been engaging with our investor community directly on covered bonds, so that would give them time to refresh lines and dial into our update call.

“That proved to be really useful, because we also used the time to collect IoIs to make sure that we were going out with the right guidance.”

On Wednesday morning, leads ABN Amro, Barclays, Commerzbank, Danske, ING, Lloyds, RBC, Santander, Standard Chartered and TD opened books for the £500m (€574m) no-grow November 2027 FRN with initial guidance of the Sonia plus 75bp area, based on IoIs around the 70bp area. Orders passed £2bn within an hour and a quarter, and guidance was revised to 68bp+/-3bp, will price in range, on the back of books above £2.9bn. The deal was ultimately priced at 65bp and the final book was around £2.5bn.

“Given that we were targeting a £500m no-grow size, we were always quite confident that we could achieve that,” said Chan, “but I wasn’t expecting the book to grow so quickly. It was then a question of finding the right balance between finding the best price for the issuer as well as making sure that investors were OK. Only £300m dropped from the book after we announced the re-offer level, so that reconfirmed that the revised pricing was right.”

The 10bp move from the middle of initial guidance to re-offer is understood to be the biggest on a sterling covered bond since at least 2017.

“As we hadn’t done anything for three-and-a-half years, we wanted to make sure that the trade was a successful one, and we achieved that,” added Chan. “More importantly, we were able to achieve pricing similar to before the market turmoil, so I’m hopeful that this transaction will encourage our UK peers to access the market again at a good price.”

Barclays placed some 25% of the new issue to non-UK European investors, which Chan said should also prove encouraging to other UK issuers in light of ongoing uncertainty over the LCR eligibility of UK covered bonds for EU investors.

Barclays now expects to be a more regular issuer in covered bonds again, according to Chan, with issuance potentially every 12 to 18 months, depending on its funding needs. Although Barclays has in the past decade focused on sterling issuance, it previously sold euro and US dollar benchmarks.

“If we see wholesale funding needs increase, then we will absolutely look to issue in euros and dollars,” said Chan. “We value diversification in terms of markets, currencies and investor base.”

Barclays photo credit: Wikimedia Commons