National Australia Bank priced a £250m 14 year sterling issue yesterday (Wednesday) after meeting with a cooler response than that for a deal in the same format from its peer CBA last week, but is said to have fulfilled its main objective of achieving the best long end economics.

National Australia Bank

The issuer priced the deal at 120bp over Gilts via Barclays, NAB and RBC on the back of an order book of around £250m (Eu315.74m), according to a syndicate official at one of the leads. The re-offer spread is in line with guidance and initial price thoughts.

NAB’s deal came in the same format and with the same maturity as a £750m deal for Commonwealth Bank of Australia that was priced at 118bp over Gilts last Thursday (23 August), with market participants noting the contrast between the transactions.

“They are very different outcomes,” said a syndicate official away from NAB’s deal. “The contrast between the two is quite stark.”

CBA’s deal was priced at the tight end of guidance of the 120bp over Gilts area on the back of an order book of around £1.4bn, and is said to have tightened some 3bp-4bp before widening, with syndicate bankers variously putting the level at 119bp over bid and 120bp/118bp over.

The syndicate banker away from NAB’s deal said that it can be risky to bring a transaction identical to a preceding one from a country peer and suggested that although there is good depth to demand in the sterling covered bond market it may be more limited given how much spreads have tightened.

“We are at the tight end of the last two years’ spread range,” he said. “Even if the relative value would be attractive, demand wouldn’t be as strong as if spreads were wider.”

RBS analysts said that “it seemed odd” that NAB decided to come with another Australian covered bond with exactly the same maturity just a few days after CBA, and noted that while the sterling covered bond market is growing quickly and features good investor demand, it is not nearly as deep as the euro or even the US dollar covered bond market.

A lead syndicate official said that NAB’s move to follow up on CBA’s deal was an opportunistic one, and that it was driven by a desire to take advantage of liquidity available in the long end of the sterling market compared with that in other currencies.

“Their main objective was to print in the most economic market on offer for longer term debt,” he said, “and sterling Gilts plus 120bp offered that.

“They were after the best long end economics and with 120bp over they achieved that.”

While the order books for NAB’s deal did not build as strongly as those for CBA’s transaction, he added, there is no single factor that stands out as explaining this, with CBA also having benefited from first mover advantage.

CBA’s deal was the first sterling fixed rate benchmark covered bond from a foreign issuer since the market reopened in autumn 2010, after NAB in January became the first Australian issuer to tap the sterling covered bond market, with a £500m three year floating rate note that was re-offered at 145bp over Libor.

Year-to-date sterling covered bond supply amounts to £12bn, according to RBS analysts, which surpasses last year’s total volume of less than £7bn.