Nationwide executed the largest sterling benchmark covered bond transaction since at least the financial crisis on Wednesday, a £1.75bn dual-tranche deal that included a short seven year fixed rate tranche, which head of secured funding Richard Merrett said exceeded expectations.

The short seven year tranche follow up on a £500m five year fixed rate covered bond Nationwide Building Society issued in October, which was the first fixed rate sterling covered bond of £500m or greater since 2017 and first fixed rate sterling benchmark covered bond from a UK financial institution since 2015.

Richard Merrett, head of secured funding at Nationwide, said that while the shorter dated FRN was a typical trade to consider, the issuer was keen to build on its five year fixed rate issue.

“The October trade set us up for this,” he told The CBR. “Coming into January, we had the funding need, and could have gone to euros, but the euro market was exceptionally busy this week – albeit not on Tuesday with the holiday – and so it made sense to try something different.

“When we spoke to the banks, it was clear that the floating rate worked. But we also received some reverse enquiries for fixed. So we were keen to sponsor that demand and continue the development of fixed rate format to be inclusive of all investor types.”

While fixed rate sterling covered bond supply has been scarce, Merrett’s prior experience on the building society’s HQLA desk had suggested it could make sense.

“We bought SSAs and the like, and the fixed format wasn’t an issue because we could use the swap market,” he said. “Moving to the funding side, I questioned why the sterling covered bond market didn’t offer a fixed alternative. So I’m pleased to have explored this further and brought it back to market.

“We explored it in the October trade and it’s apparent that there are accounts out there who want specifically fixed rate flows in sterling and are happy to buy this, which is great.”

Leads BMO, HSBC, Nomura and RBC opened book on Wednesday morning with guidance for the rare dual-tranche sterling trade of the Sonia plus 47bp area for the July 2029 tranche and the mid-swaps plus 64bp area for the December 2032, with the covered bonds carrying expected ratings of AAA/AAA (S&P/Fitch). After around two hours, they reported combined books above £2.5bn, including £180m of joint lead manager interest, evenly split between the two tranches.

Then after close to three hours, they set the spreads at 42bp and 60bp, respectively, on the back of more than £3.15bn of demand, £1.75bn-plus for the FRN and £1.4bn-plus for the fixed. The deal was ultimately sized at £1.75bn (€2.02bn) – the maximum Nationwide was seeking – with tranches of £750m for the FRN and £1bn fixed, on the back of final books of £1.8bn-plus and £1.4bn-plus.

“It just went really smoothly from start to finish,” said Merrett (pictured). “I don’t see how it could have gone any better.”

“Originally, when we looked at the dual-tranche idea, we would have expected the fixed portion to be perhaps smaller or the same as the FRN,” he added, “so we were incredibly happy with the outcome we got, and the quality of that fixed book was exceptional.”

Of the fixed rate tranche, 80% was allocated to the UK and Ireland, 7% to northern European accounts, 6% to Germany, Austria and Switzerland, 6% to other Europe, and 1% elsewhere. Bank treasuries took 69%, asset managers 20%, and central banks and official institutions 11%.

“There were definitely some rarer names in the seven year who were purely after the fixed,” said Merrett, “and that diversification is great for us, because it increases the number of accounts who will buy us in different formats.”

The UK and Ireland took 85% of the FRN, northern Europe 4%, Germany, Austria and Switzerland 2%, other Europe 5%, Asia-Pacific 3%, and other 1%. Banks treasuries were allocated 69%, asset managers 20%, hedge funds 5%, official institutions and central banks 3%, insurance companies and pension funds 2%, and other 1%.

The FRN was seen pricing with no new issue premium, while fair value for the short seven year fixed rate tranche was put by the leads in the very high 50s to 60bp, based on top tier SSAs coming in five years at around 40bp-41bp and adding around 10bp for the curve extension and 10bp for SSA-covered bond differential.

Anand Somaiya, FIG DCM at HSBC, noted that the December 2032’s pricing at 60bp was 2bp inside where French agency Cades on Wednesday sold a shorter, July 2031 benchmark, underlining the strength of Nationwide’s trade.

“They were very deliberate with their strategy on the fixed rate tranche,” he said, “they didn’t take every basis point out of it as they are keen to support the asset class going forward, and they didn’t oversize it either – we were very comfortable delivering the £1bn there and they got their maximum size across the whole deal. And the proof is in the pudding: both tranches are around 1bp tighter in secondaries.

“So from that perspective, they’ve absolutely nailed it, and overall it was a real masterclass from Nationwide.”

According to Merrett, the short seven year tranche in sterling had been seen as offering an estimated 9bp-10bp saving versus euros, although he acknowledged that the strength of the euro market this week meant that it may ultimately have been a little less. He said a seven year sterling FRN may have come slightly tighter, but noted that the rarity of such trades meant that the differential was uncertain.

With Nationwide having now demonstrated the possibilities in fixed rate sterling covered bond issuance, further supply could be forthcoming, suggested Somaiya.

“I expect that the less frequent issuers will continue to do threes and fives in floating rate,” he said, “because there isn’t arbitrage per se in doing a seven year fixed. But some of the bigger funders, or those who have been more reliant on floating rate, may look at this.”

Nationwide, whose financial year ends on 31 March, is meanwhile unlikely to be active in covered bonds before then, according to Merrett, but will return in its new financial year.