Abbey reopened UK euro covered bond issuance after more than one-and-a-half years without supply today (Tuesday), meeting with solid and high quality demand for a Eu1bn seven year deal, said bankers, while Commerzbank was out with a 10 year mortgage Pfandbrief.

Santander offices, London

Today’s deal for Abbey National Treasury Services, Santander UK’s covered bond issuer, is the first new euro benchmark UK covered bond since February 2012, when Barclays Bank priced a Eu2bn five year at 78bp over mid-swaps. Abbey tapped an October 2017 issue for Eu500m at 145bp over around two weeks later.

UK issuers have been able to benefit from cheap funding available via a HM Treasury and Bank of England Funding for Lending Scheme (FLS), which was introduced in July 2012 and has contributed to a drop in public market issuance by UK financial institutions.

A syndicate banker at one of the leads said that the FLS continues to offer cheaper funding, but that issuers like Abbey are mindful of normalising market access given that the scheme is not a permanent fixture and UK economic data has improved.

The FLS was launched in an attempt to stimulate lending to the real economy.

Leads Credit Suisse, HSBC, Santander, UBS and UniCredit built an order book of around Eu1.5bn for Abbey’s transaction and will price a Eu1bn deal at 21bp over mid-swaps.

The transaction was initially marketed at initial price thoughts of the low to mid-20s over before guidance was set at the 23bp over area.

At 21bp over, the deal is coming some 5bp back of where fair value would be, based on secondary market levels, according to the lead syndicate banker. Abbey April 2021s are trading at around 17bp over, implying fair value of 16bp over for the November 2020s, he added.

“So there’s pretty decent value, with room to perform,” he said. “It’s a pretty solid trade.”

The issuer had some capacity to raise pre-funding and made an opportunistic decision to proceed with a transaction given the strength of the market, he said.

Asked whether he would have expected more demand for Abbey’s transaction given the lack of UK euro covered bond supply, another lead syndicate official said that the leads are pleased with the transaction, which attracted more real money accounts than expected.

“It’s different from the others,” he said. “It’s not as bank heavy, and better quality than we expected.”

A syndicate official away from the leads was impressed by Abbey’s deal, saying that the pricing was a “fantastic achievement”. He said that market participants had different expectations for the deal given the length of time without UK euro supply and that, in the context of recent transactions in covered bonds, a Eu1.5bn order book a decent result.

Another syndicate banker away from the deal had expected the deal to “fly” given the lack of UK euro supply, and for the deal to be re-offered at 20bp over. He put fair value in the mid to high teens and said that initial price thoughts therefore looked generous compared with that.

He had been unaware of the transaction, but said that it made sense in terms of pricing and maintaining credit lines and a presence in the market.

Syndicate bankers said they are not expecting a rush of UK euro issuance in the wake of Abbey’s deal, but that a pick-up in supply from the region is more likely to be a theme for next year.

“I wouldn’t be surprised to see a very different 2014,” said one.

Commerzbank is pricing a Eu500m no-grow 10 year mortgage Pfandbrief today. Leads Barclays, Commerzbank, Crédit Agricole and NordLB gathered more than Eu700m of orders for the transaction, which they will price at 6bp over mid-swaps. Guidance was set at the 7bp over area, after initial price thoughts of the high single-digits.

Today’s issue is Commerzbank’s second off a new mortgage Pfandbrief programme, coming after an inaugural, Eu500m seven year on 19 October that was re-offered at flat to mid-swaps. A lead syndicate banker said the 2020s were around 3bp-4bp through mid-swaps.

Commerzbank’s deal is the first core benchmark covered bond since a Eu1bn seven year for Norway’s SpareBank 1 Boligkreditt struggled last Tuesday (12 November), with investor pushback to tight spreads mentioned as a contributory factor. SpareBank’s deal was priced at 15bp over mid-swaps.

The mortgage Pfandbrief is the first covered bond of 10 years or longer from a core jurisdiction since Caisse Française de Financement Local (Caffil) sold a Eu500m 15 year on 25 September. CM-CIC Home Loan SFH sold a Eu1bn 10 year at 36bp over in early September.

A syndicate official away from Commerzbank’s leads said that the pricing was in line with her expectations and that Eu700m was a good outcome for a 10 year deal.