TSB attracted more than €4.25bn of orders to a €500m no-grow five year inaugural euro benchmark covered bond yesterday (Monday), allowing it to price the debut with as good as no new issue premium, and an official at the issuer said it couldn’t have hoped for a better outcome.

TSB Bank’s covered bond issuance had previously been confined to sterling, where levels for UK banks were comfortably inside euros, and last year the bank issued £1bn and £750m four and five year floaters in February and September, respectively, the latter in conjunction with a tender offer.

However, the UK issuer had for some time been eyeing a euro benchmark covered bond for strategic reasons.

“We did a lot of investor work in 2023, going out and meeting accounts, so we felt that we’d laid the groundwork for a euro debut,” Edward Javan, head of balance sheet management at TSB, told The Covered Bond Report, “but we wanted to make sure that we launched into a good market. And it was clear from other transactions just how strong the euro covered bond market was right now for new issuers, those coming from outside of the core of the Eurozone.

“We also had a consistent messaging from our counterparts at the various banks that for the kind of trade we wanted to bring, it made sense to jump in and do it.”

A syndicate banker at one of the leads supported this.

“You’ve seen issuers – like southern European names and UBS again today – be able tighten 8bp across the curve, and there has been a lot more support from real money investors and some official institutions,” he said. “And between TSB, Novo Banco and UBS, you’ve now got three inaugural deals with just massive books.

“If we look at the beginning of the year, where euro pricing was and how the market was behaving, it didn’t necessarily make sense versus theoretical sterling levels,” he added. “But the market kind of turned over the last few weeks and sentiment is really good right now, so they could take advantage of that.”

The mandate for a €500m (£427m) no-grow five year transaction was thus announced last Wednesday morning, and marketing scheduled through to Friday noon, with a total of 14 investors taking meetings, and indications of interest from 44 accounts received. One focus of discussions was the rationale for TSB’s euro debut.

“Essentially, we want to diversify our investor base,” said Javan. “We’ve got two objectives: one, to support the repayment of drawings under Bank of England’s TFSME scheme; but at the same time and thereafter to have the ability to continually raise funds from the wholesale markets to support the growth of our asset book. The more markets and the more investors we can access, the more flexibility we have to do that.

“It was great to be able to meet all those investors over the three days and to get their feedback,” he added. “That then fed into the good momentum on Monday morning.”

An update at Friday lunchtime teed up launch for Monday, subject to market conditions, and leads ABN Amro, parent Banco de Sabadell, BMO, LBBW and Lloyds yesterday morning duly opened books with guidance of the mid-swaps plus 60bp area for the March 2029 issue, expected rating Aaa. After around an hour and 10 minutes, the leads reported books above €1.75bn, excluding joint lead manager interest, and after around two hours, they set the spread at 52bp on the back of books above €3.4bn, excluding JLM interest. The book grew further and more than €4.25bn of orders, excluding JLM interest, were good at re-offer, with more than 100 accounts placing orders.

Market participants put the pricing at roughly flat to fair value – even if the lack of previous TSB issuance and indeed any recent comparable UK supply necessitated a large degree of price discovery helped by the roadshow.

“If you look at the comps,” said the lead banker, “one that the market was looking at was the Virgin Money trade out there, and they landed pretty much flat to that, so they were able to get a deal done in a good market without really paying up for being a new issuer, which was great.”

According to pre-announcement comparables circulated by the lead, the Virgin Money (Clydesdale Bank) 3.75% August 2028s were at 51bp, mid, while Nationwide 3.625% March 2028s were at 33bp, Coventry Building Society 0.01% July 2028s at 45bp, Yorkshire Building Society 0.01% November 2028s at 51bp, and Nationwide November 2028s at 39bp. The latter, a €1bn five year trade in November, was the last UK euro benchmark covered bond.

“I don’t think we could have hoped for a better outcome,” said Javan. “We’ve been working on it for a long time and are really pleased for it have to have been received so well, with such a wide range of investor classes and distribution across geographies.

“Our expectation is that as we return to the euro covered bond market, investors will hopefully participate again,” he added, “but also that we’ll continue to attract new investors who see that TSB is building out a curve in the euro covered bond market.”

UK accounts were allocated 36%, Germany, Austria and Switzerland 30%, APAC 11%, Nordics 9%, Benelux 9%, and other Europe 5%. Fund managers took 43%, banks 38%, central banks and official institutions 15%, and other 4%.

“You are always going to have the domestic following,” said the lead banker, “given that they’ve been buying them before and will look at this euro versus their home currency, but a lot of the demand was driven by real money accounts from other countries who may not have been involved in the sterling issuance. So they were pretty successful from a diversification standpoint.”

As well as having issued its inaugural euro benchmark, TSB continues to closely monitor sterling secured funding markets in covered bonds and RMBS, amid a revival of the RMBS market for UK issuers.

“TSB has now accessed RMBS, sterling covereds, and euro covereds since it was re-launched in 2014,” said Javan, “and this diversification into euro covereds gives us more flexibility to balance our funding needs across different markets as we work through our funding plans over the next three to four years.”