A £750m five year Nationwide Building Society FRN repriced UK covered bonds tighter in the sterling market yesterday (Thursday), repositioning them inside RMBS, which had recently come optically inside the dual-recourse instrument amid a renaissance in the UK securitisation sector.

On 17 May, Lloyds issued its first Permanent residential mortgage-backed securities (RMBS) since 2019, a £1bn five year deal, rated triple-A, that was also the largest UK prime RMBS issue since January 2020. The securitisation was priced at Sonia plus 52bp, after IPTs of the mid-50s and on the back of peak oversubscription around 2.5 times and final oversubscription of around 1.6 times.

That spread put the RMBS apparently inside level for sterling covered bonds in the secondary market. A lead banker said the new Nationwide covered bond was launched with a view to testing the respective levels and potentially restoring the “natural order”.

“There hasn’t been much sterling covered in recent months, while there have been a lot of fluctuations in terms of liquidity in the secondary market, so there was a certain degree of price discovery for a new issue,” he said. “One very topical factor is the RMBS market – in particular, we saw Lloyds coming a couple of weeks ago with their Permanent brand, which hasn’t been active in the market and enjoys some rarity value in the RMBS space.

“They printed quite a big trade at 52bp, which was a pretty strong outcome overall. It also raised some eyebrows in respect of the relative value between covered bonds and RMBS given the structural characteristics of each market.”

Coventry Building Society £500m March 2028s – the last five year sterling UK covered bond, issued on 7 March at 50bp – were seen at 49bp, while Nationwide April 2026s were at 45bp, according to pre-announcement comparables circulated by the leads. Nationwide Silverstone Master Issuer (SMI) RMBS paper was, meanwhile, seen at 43bp-44bp.

“It was a bit of a fine balance between respecting the covered comps, so you’re not starting with something completely out of kilter with where fair value is implied by secondaries ” said the lead banker, “but also reflecting the levels at which we’ve seen demand in the other product, which should justify a tighter outcome on the covered bond side.

“We felt a level in the 40s would be a better reflection of the relative value between the products and where we see any cross-over buyers bidding.”

Leads Barclays, HSBC, Lloyds, NatWest and Nomura went out with initial price thoughts of the Sonia plus 53bp area for the June 2028 sterling benchmark, expected ratings AAA/AAA (S&P/Fitch).

“We got really good momentum,” said the lead banker, “and we had a fairly rapid progression. We then moved decisively to 48bp to achieve a fantastic outcome and recalibrate the RMBS to covered differential to something that makes a little bit more sense.”

A banker away from the leads said the new issue came 2bp inside fair value based on secondary covered bond levels alone.

Having peaked at around £1.4bn, the final book was £975m and the size was set at £750m (€870m). Some investors had indicated sensitivity should the pricing go into the 40s, according to the lead banker, with these accounts being less UK bank treasuries attuned to RMBS levels and more asset manager-type accounts focussed on other comparables.

The lead banker said Nationwide’s success in repricing the sterling asset class tighter leaves the market in a good space for subsequent issuance.

“Euro covereds have already been more expensive at this point in time,” he added, “and obviously shaving off a number of basis points from where sterling covereds come is only going to exacerbate that. But there are other qualitative factors that come into issuer’s decision whether or not to issue in euros, such as diversification of funding, strategic market access, the depth of the investor base, and so on.”