Nationwide Building Society last Tuesday issued the first fixed rate sterling covered bond from a UK financial institution in over a decade, a £500m 4.125% five year deal via BMO, Lloyds, Nomura and Santander.

The previous such trade was a £500m (€576m) seven year for Lloyds in March 2015, while Nationwide itself had not issued a fixed rate sterling benchmark since 2011, when it sold a £750m 5.625% deal with a maturity date of January 2026.

A banker at one of Nationwide’s leads said the rare transaction was launched off the back of reverse interest in the format.

“For the most part, sterling has been an FRN market, with only the occasional long dated floater,” he noted. “But there were some investors on the bank and official institution side who had a specific fixed rate bid, and had done so for a while – there are a few legacy UK fixed rate covered bonds outstanding, such as a 2029 from Santander UK that was an old 17 year, that people can buy, but they’re really hard to get in the secondary market.”

On the building society’s side, the format offered a different option to its recent funding, added the lead banker.

“Nationwide did a sterling FRN earlier this year and they have another October 2030 maturity in FRN format, which was originally a seven year, while they may be looking to do an FRN early next year as well,” he said. “Most of their RMBS have been issued in the three year bucket.

“So they could have gone shorter or longer, but all that made them more open to the idea of a five year in this format. Their secured funding needs are also relatively modest, so they didn’t need the typical £750m-£1bn size. Overall, this fitted quite well into their needs.”

The deal was also notable for being priced over Sonia mid-swaps.

“All the sterling fixed rate covereds before, even some of the more recent German supply, have been priced over Gilts,” he said, “but we took a page out of the SSA book and just priced over Sonia mid-swaps. The SSA market has been doing that for the last year or so, and it makes it a little bit easier to comp to the FRNs that were outstanding.”

After going out last Tuesday (14 September) with guidance of the mid-swaps plus 55bp area for the £500m no-grow October 2030 transaction, expected ratings AAA/AAA (S&P/Fitch), the leads around one hour and 35 minutes later reported books above £1.5bn, including £100m of JLM interest. After around two hours and 15 minutes, they set the spread at 50bp on the back of more than £1.8bn of demand.

Recent building society FRNs were bid in the context of 47bp-48bp over, according to the lead banker, while SSA paper was in the low-30s over Gilts.

“Fifty-five was a pretty good starting point,” he said, “and they got quite a big book. It was a mix of people who would anyway have bought an FRN and swapped it back, but also quite a bit of fixed-specific demand, either from some of the investors who can buy both but wanted more fixed paper, and also from some investors who have a fixed rate-only mandate and are more active in the SSA space and were happy to have the opportunity to buy some triple-A paper in covered format.”

The lead banker said that a seven year could also have worked, albeit with some banks likely dropping out, but other accounts taking a look.

“If you’re a large UK issuer who’s already got a lot of covered and RMBS outstanding or maybe just the pricing isn’t looking so good, and you want to try something different domestically, this is another tool available to you, even if it’s not going to supplant the FRN market,” he added.