BayernLB is tapping into an undersupplied sterling market today (Wednesday), pricing a £200m (Eu231m) no-grow two year floating rate mortgage Pfandbrief that a lead syndicate banker said represented competitive funding versus euros but was driven by sterling funding needs.

Sole lead RBS went out with a fixed spread of 20bp over three month Libor this morning and closed the order books at 0945 London time. Given the capped issue size the order books were not kept open unnecessarily long, and the deal was oversubscribed, said Jez Walsh, global head of covered bond syndicate at RBS.

“We went out with a fixed spread because we knew that demand is there,” he added, “and 20bp was the level where we knew the deal would clear given where outstandings are trading.”

The deal gained momentum quickly after it was announced this morning, he said, with orders reaching just over £200m in little over an hour after the transaction was launched.

Comparables including UK covered bonds such as Barclays Bank and Nationwide 2015 FRNs and a 2015 floater for National Australia Bank are around 20bp over bid, according to Walsh.

The re-offer spread of 20bp is equivalent to around 13bp through mid-swaps in euros, he said, although the deal was driven by generic sterling funding needs.

Taking into account that a Bayerische Landesbank 3.25% June 2015 fixed rate euro issue is quoted at -8bp/-13bp versus mid-swaps, this means that the sterling deal would have also provided the issuer with attractive funding if the proceeds had been swapped to euros, added Walsh.

Syndicate bankers away from the deal had said that the issuer was paying up versus euros, but played down this aspect of the transaction, which they welcomed overall.

One put the euro equivalent level at 11bp through mid-swaps, which he compared with an outstanding November 2014 fixed rate euro issue quoted at around 17bp through to indicate a 6bp premium versus euros.

“But that’s not massively relevant, and not how investors will look at it,” he said. “I’m happy, I’m glad it got done.”

Today’s deal is BayernLB’s first public sterling covered bond since 2007.

The new issue comes after a debut Nordic sterling covered bond launched for Sweden’s Stadshypotek yesterday (Tuesday), a £250m three year FRN that provided the Svenska Handelsbanken subsidiary with cheaper funding than euros, although the domestic market is the ultimate reference point for Swedish covered bond issuers – at 23bp over three month Libor Stadshypotek’s sterling deal offered funding at a cost comparable to that available domestically, according to bankers on the deal. (See here for previous coverage.)

“The sterling market is offering exceptional pricing,” said Walsh.

A £500m debut public sterling covered bond for Australia’s ANZ Banking Group on 24 January opened the sterling market this year, which has been undersupplied in light of a UK government Funding for Lending Scheme (FLS) that offers the country’s financial institutions cheaper funding than market rates and has put a brake on UK financial supply in sterling and euros.

BayernLB’s last benchmark covered bond was a Eu500m 10 year public sector Pfandbrief in July 2012.