Principality Building Society successfully inaugurated a €5bn Regulated Covered Bond programme on Wednesday, a £500m five year Sonia-linked trade that hit its size and price targets, with the instrument now giving the financial institution greater optionality and flexibility in its funding.

Principality is the UK’s sixth largest building society, with £14.1bn in total assets, with all of its larger peers having already entered the covered bond market, and it sees the additional funding option as supporting its sustainable growth ambitions.

The debut was the culmination of 18 months’ preparations, during which time the building society worked on the programme with the support of joint arrangers BNP Paribas and HSBC and its legal advisors, A&O Shearman, as well as its peers within the UK Regulated Covered Bond Council (UK RCBC).

The programme was approved by the Financial Conduct Authority (FCA) in September, after which Principality held investor roadshow meetings in the fourth quarter. With a prospectus dated 19 December, the groundwork had thus been laid for a potential January debut that could build on this momentum.

Nationwide showed the sterling covered bond market to be in great shape when it reopened the market on 9 January with a dual-tranche trade split into £750m three-and-a-half year FRN and a rare £1bn short seven year fixed rate tranche.

“That enjoyed a fantastic outcome and demonstrated the liquidity that was available,” said James Whetman, managing director, FI DCM at HSBC, “and the Principality team were keen to take advantage of a good window in which to get their name established.”

The mandate for the £500m (€577m) no-grow five year floating rate note was then announced last Monday (12 January), with further investor calls and feedback collected before the deal was launched on Wednesday morning.

Joint leads BNP Paribas and HSBC opened books with guidance of the Sonia plus 55bp area for the January 2031 covered bond, expected ratings Aaa/AAA (Moody’s/Fitch). A first book update put demand above £975m, including £30m of joint lead manager interest, and after close to four hours, they set the spread at 50bp on the back of books above £1bn, pre-reconciliation and excluding JLM interest. The final book was above £1.05bn.

The leads saw fair value for larger peers at around 47bp, with comparable five year FRNs issued last year by Coventry, Leeds and Skipton trading around Sonia plus 45bp-46bp, and the curve extension worth 1bp-2bp.

“On that basis, 50bp was an extremely good result,” said Whetman, “very compressed to the rest of the market, with just a bit of premium to reflect this being an inaugural trade and anything that may be appropriate for the credit.

“UK bank treasuries were delighted to see a solid new name establishing a presence in this market,” he added, “and Principality enjoyed strong interest from this investor community – but also really good asset manager demand.”

The size and price met the issuer’s ambitions for an inaugural benchmark.

“Principality is delighted to diversify our wholesale funding sources through the covered bond issuance, allowing us to establish a broader investor base to build on in the future,” Chris Peters, Head of Balance Sheet Management at Principality Building Society, told The Covered Bond Report.

As well as investor diversification, the building society sees quicker access to markets as a reason for entering the covered bond market. Principality will meanwhile retain its established Friary residential mortgage-backed securities franchise alongside the programme to keep its funding options open – it has £1.025bn of RMBS outstanding.

“Covered bonds offer issuers additional flexibility versus standalone RMBS,” said John Millward, managing director, structured finance group, HSBC. “It allows them to access the market more nimbly and opportunistically, with a shorter turnaround time, wider investor base, and broader range of maturities available.

“The covered bond programme therefore significantly increases Principality’s wholesale funding capacity.”

The last new entrant to the UK covered bond market, Paragon Bank, pioneered buy-to-let collateral in its issuance, but Principality’s is broadly in line with the established programmes of its peers.

While 24% of its mortgage lending is in its home territory of Wales, the balance is spread across the rest of the UK. Its initial cover pool is £965m.

Principality now sees covered bonds as central to its wholesale funding plans and expects to be in the market annually, initially in sterling before exploring different tenors and currencies in the medium term.