Nationwide has been the only UK financial institution active in covered bonds this year. What is it about your strategy that explains this presence, most recently with the €500m 20 year deal?

It’s important for Nationwide to remain active in wholesale markets, despite the availability of central bank funding. While we have a strong liquidity position, we feel that the current opportunity in the market is one that we would look to take advantage of, and – particularly with the two recent transactions – a prudent thing for us to do when it comes to providing long term stability to the cost and maturity profile of our liabilities. Our mutual business model allows us to take a long term view of the balance sheet, which is in the best interest of our members.

You bought back around £2bn of covered bonds in September. When you did that, was it with a view to freeing up capacity for such new issuance, or was that just something that became possible as a result?

The two projects weren’t linked, the buyback was executed for standalone reasons but no expectation of issuance activity thereafter. But clearly there are positive links between the two – as you say, it freed up capacity in terms of investor lines, and the impact on pricing helped the new issue and the level we’ve been able to achieve.

Why did you feel it was the right time for the 20 year euro covered bond?

Krishan Hirani, Nationwide

While nobody from the UK has ever looked at the 20 year tenor before, Nationwide has been active with 15 year transactions in the past, so we are comfortable issuing long dated euro covered bonds. We see the euro covered bond market as a cost effective way to extend our maturity profile in comparison to many of the other funding tools that we have at our disposal. At the moment, the cost of issuing 20 years versus 15 years is flat on an all-in basis, so from our perspective it made absolute sense to extend duration at the same cost. The investor base does become narrower as you extend along the curve, but the yield pick-up for investors made this transaction an attractive proposition for them, too.

Were you surprised at just how well it went?

You can never be overly confident when it comes to launching transactions, particularly in an untested market, but two factors gave us confidence ahead of announcing this deal.

Firstly, from an investor relations point of view, we’ve been doing a lot of work keeping in touch with the European investor base throughout the Brexit period. So we felt we had good dialogue with European investors and that we knew what they were broadly thinking when it came to their views on the UK. That was very important in terms of giving us the confidence to not only look at a euro-denominated transaction, but also in this particular part of the curve.

Secondly, we’d seen strong demand for other recent long dated transactions, even if they were from different jurisdictions, and good secondary performance, too.

In terms of how it went on the day, I think it’s fair to say it did beat expectations. We weren’t expecting an order book north of €2.3bn – that was definitely a positive surprise for us, and gave us a strong platform to price the deal at a level inside the theoretical fair value. I think the reception we received is testament to Nationwide’s investor relations work, our standing in the market, but also the positivity and technicals in covereds at the moment – the lack of supply in particular is a factor playing into that.

You mentioned Brexit – have you found there are accounts saying, sorry, we are not interested anymore? Is it a topic you need to clarify much on?

Clearly through the uncertainty of the last two or three years, there were a number of European investors who had paused UK investments, but this isn’t the case anymore. The dynamic has certainly shifted as we now have clarity on the Brexit deal and the impact going forward for the UK and Europe. The majority of those investors who had paused given the uncertainty now have the clarity that they need to make a decision on UK investments. And this was evidenced in our deal, with the vast majority (98%) of demand coming from continental Europe, with a mix of investor types.

Looking back to your previous benchmark, the £1bn 10 year FRN, that was also a novel transaction. Ten year FRNs in general are rare, let alone a UK or sterling covered bond.

The sterling covered bond market is Nationwide’s home market – it’s our cheapest to deliver wholesale funding platform. Typically, it is a short term market, three to five year transactions are the norm, and in 2020 we saw the first seven year deal priced in this format. But, very much aligned to what we’ve been thinking about in euros, we saw the opportunity this year to look to extend that even further. For Nationwide, we are looking to avoid any concentration around our TFSME maturities, and other maturities that we have across the funding and capital stack. So taking that opportunity to push out maturity options in covered bonds even further is something that we’ve been keen to do, and this year we had the opportunity to look to do that in sterling, and the results from our point of view were spectacular. Hopefully that’s something we can build on going forward. What we’ve done in euros is very similar, it’s been the same strategic aim in both of those markets, looking to push the boundaries in terms of the tenors available, but at the same time being able to issue at historically tight levels.

What is it that made the longer dated sterling FRN possible? Investors willing to go further along the curve, or a different investor base?

A combination of the two. Traditionally the investor base in the sterling floating covered market has been dominated by bank treasuries. Pushing the tenors out beyond five years, you naturally lose some of that interest, although what we have seen is many bank treasuries continuing to participate along the curve. But for the 10 year product you would typically expect to see more asset manager demand and even some pension demand, and that was what we had in our transaction, a good mix of bank treasuries (56%), asset managers (32%) and pension funds (12%).

Will we see further covered bond issuance from you this year?

Despite the recent activity, our funding requirements are expected to remain modest compared to a typical funding year for Nationwide – this is mainly due to availability of TFSME and also the society’s strong retail performance. As always, funding requirements are closely monitored, and additional requirements could materialise and/or we could look at pre-funding opportunities later in the year across secured and unsecured formats.

Nationwide Building Society’s $1bn (£772m, €910m) comeback came just a day after Santander UK issued the first US dollar benchmark in 144A format from a UK issuer in almost eight years, a $1.25bn three year. The previous 144A dollar benchmark was a $2bn Barclays five year print in 2012.

Krishan Hirani, senior manager, funding and capital markets, Nationwide Building Society, told The Covered Bond Report that its “re-inaugural” US dollar benchmark was targeted largely at diversifying funding options ahead of refinancing of funding drawn under the Bank of England’s Term Funding Scheme (TFS) that it is due to face over the next two to three years.

“We added the 144A capability back into our programme around September last year,” he said, “so the deal had been in the making for quite a while, the reason being that we’re looking forward to a period where we will have increased funding requirements over and above what we’ve typically been used to.”

The TFS was launched in August 2016, offering four year funding to UK financial institutions at an attractive level. According to Barclays analysts, as of Q3 2019, UK financial institutions had £115.3bn of TFS funding outstanding, of which £94.6bn was from covered bond issuers, with repayments set to be the heaviest in Q4 2020 and Q1 2021. Nationwide and Santander UK have the third and fifth highest TFS funding outstanding at £17bn and £10.8bn, respectively.

He said the 144A format appealed to Nationwide in particular given its experience issuing dollar asset-backed securities (ABS), and that in light of this, it was confident the Reg S/144A covered bond would be met by a receptive US investor base.

“The US is not as familiar with covered bonds, because there isn’t a domestic issuance market for them,” he said. “But from our experience in ABS, we know there is a deep market there for triple-A structured product.”

He said the level of onshore US investors in the deal’s order book clearly demonstrated their efforts had paid off.

“They accounted for around a third of the book, which was fantastic,” he said.

He said that beyond helping the issuer plan for TFS repayments, dollar covered bonds can be a reliable source of cost-effective funding.

“It’s not an opportunistic or one-off transaction,” he added. “We are committed to this market and will see it as one of our core funding options going forward.”

Hirani added that the pricing was roughly flat to where a theoretical three year equivalent in euros would price, but stressed that it was difficult to draw comparisons in view of the lack of shorter-dated euro benchmark issues.

After announcing the mandate on Wednesday morning, leads Citi, HSBC, Nomura and TD went out with guidance of the mid-swaps plus 30bp area for the US dollar benchmark-sized three year trade. After the guidance was revised to 27bp+/-1bp on the back of orders over $1.6bn, excluding joint lead manager interest, it was ultimately priced at 27bp, with the issue being sized at $1bn on the back of $1.5bn of demand.

A syndicate banker at one of the leads said the transaction was a stellar result for the issuer, especially considering it was its first dollar benchmark since 2007. He said intraday execution was deemed appropriate after the success of Santander UK’s issue, which attracted over $1.7bn of demand, while being launched alongside a £1bn seven year Sonia-linked FRN.

“It made sense for Santander UK to go for a multi-step process,” he said, “because its trade was a re-entry for the UK into this market, and even more so because it was part of a dual-tranche deal.

“In order to really capture the European and Asian bid, we announced shortly after the London open,” he added, “and when it came to the New York open, the book was already $1.1bn, which was powerful and well in excess of what they wanted to print.”

He saw fair value for the trade at 27bp, based on Santander UK’s 2023 paper at 28bp, implying zero new issue premium, and said that landing 1bp inside of its compatriot was an excellent achievement.

Santander UK’s and Nationwide’s deals came just days after the UK finally left the EU on 31 January.

Hirani said that in spite of uncertainties surrounding Brexit trade talks – which could elevate UK risks towards the end of the year – market conditions have been remarkably supportive.

“As thing stand, conditions are as good as they’ve been for a very long time,” he said, “probably the best since pre-referendum, in terms of spreads and investor appetite.

Euro benchmark issuance kicked off in earnest on Wednesday, 2 January this year, with seven deals totaling €6.5bn hitting the market by the end of the first week, as well as a sterling benchmark.

However, with 2 January 2020 being a Thursday and parts of Europe, including some German states, off on Monday, 6 January, syndicate bankers said that issuance might not begin until the Tuesday of the second week (7 January).

“I could see a lot of people using that phase to extend their holiday until 7 January before kicking things off,” said one.

“Issuers have done a lot this year, so I don’t think there will be a huge rush,” he added, “and I can see them having a much more relaxed start to the year.”

But another syndicate banker said issuance in the first week should not be ruled out.

“If the market continues to be strong, why wait?” he said. “There are always enough people around, the only difference this time being the holiday on the 6th and the possibility of them not returning on the 2nd and 3rd.”

Syndicate bankers also said that there was a slim possibility of New Year trades being announced prior to Christmas.

“It was the case last year that things were announced towards the end of this week,” added the syndicate banker, “which probably won’t be the case this year, but never say never.”

Syndicate bankers said that last week’s decisive UK election result and the subsequent increased likelihood of a 31 January Brexit date relieved some of the uncertainty that has periodically plagued the market for over three years. One said Boris Johnson’s victory removed a “big psychological block” from the market environment, as his strong parliamentary majority should now be in a position to secure the month-end departure date.

“It adds some positive background noise, no more than this,” he said, “but a different outcome would most likely result in a psychological burden.

“Given that the Brexit thing seems to be more or less out the way,” he added, “and its quiet on the Chinese front, there is no reason why the market shouldn’t start in style early next year.”

Another banker said the positive signals amid the ongoing trade war between China and the US were contributing to an overall healthy market environment for the start of 2020, especially when compared to the start of 2019.

“There’s clearly a lot more certainty now than there was this time last year,” he said, “when QE ended and we were in a winding-down phase in Q4.”

However, he said that despite more favourable market conditions, the first deals in January are unlikely to be higher beta trades.

“It’s not healthy to the extent that we can kick off with things like Tier 2 from semi-peripheral countries,” he said, “and a lot of syndicate guys agree this is not the approach we’ll see in January.”

Another banker said that, coupled with the low yield environment, the attraction of higher beta assets remained a risk for covered bonds, but that the asset class’s “loyal followers” would buy regardless.

“The better the overall environment is, the easier it is for people to get involved in trades,” he said, “which, in addition with the 40% of the ECB, makes any Eurozone covered bond more or less a done thing before it even starts.”

The mandate for the new issue was announced yesterday (Monday), with Yorkshire due to its first euro benchmark since April 2017 and only the second UK euro benchmark of the year, after a EUR1.5bn five year for Lloyds on 18 March that drew EUR4.7bn of demand.

Leads Danske, HSBC, Natixis and UniCredit went out with initial guidance of the mid-swaps plus 22bp area for the EUR500m no-grow five year issue this morning. The deal was oversubscribed after seven minutes, according to a lead syndicate banker, and after around half an hour orders passed EUR1.5bn.

After an hour and a quarter guidance was revised to the 17bp area on the back of books above EUR2.5bn, excluding joint lead manager interest. When the books were closed after less than two hours, orders were above EUR3.5bn, excluding JLM interest, pre-reconciliation, with some 140 accounts involved.

“That’s huge for a small UK building society,” said a lead syndicate banker. “Brexit concerns seem to be a bit far away now.”

He put the new issue premium at zero, with others suggesting it was between zero and 2bp, and this was seen as being in line with recent core issuance – even if it might seem strange to consider the UK “core”, noted one.

The double-digit spread for a triple-A, core five year covered bond was highlighted as a key selling point for the deal, being above the prevailing single-digit spreads for comparable paper.

While there was a consensus that 15bp was an appropriate landing point for Yorkshire’s deal, some bankers away from the leads suggested the starting point had been unnecessarily defensive, taking into account how successful Lloyds’ deal had been and how it had tightened, from 18bp to 11bp, mid, after having paid a new issue premium of 3bp-4bp.

“It’s probably safe to say that, post-Lloyds’ reception, it was fairly evident that investor acceptance of UK covered bond risk remains intact,” said one, noting that names such as Santander UK and Nationwide Building Society had rallied in the wake of Lloyds’ success. “So it was a little bit surprising to see them starting off so defensively.

“But don’t get me wrong,” he added, “it’s a fantastic outcome for the issuer.”

The lead syndicate banker acknowledged that there had been discussions about the appropriate starting point for the transaction, but he noted that some accounts were still unable to participate due to the scale of the issuer and Brexit concerns, and also that names such as Coventry, Leeds and Skipton Building Societies were trading in the high teens to 20bp over.

“Yes, versus Lloyds at 11bp, we offered quite a decent pick-up,” he said, “but versus other building societies, less so. We therefore decided that we would allow for some price discovery.”

Yorkshire has mandated Danske, HSBC, Natixis and UniCredit for what will be its first euro benchmark since a EUR500m (£432m) six year in April 2017. The UK issuer’s last benchmark overall was a £500m five year Sonia-linked FRN debut in November last year.

That was one of a string of UK FRN covered bonds in their domestic market, but amid the ups and downs of Brexit negotiations, the only UK euro benchmark so far this year has been a EUR1.5bn five year for Lloyds on 18 March. However, that drew EUR4.7bn of demand, and market participants expect Yorkshire’s new issue to go well tomorrow, particularly with any Brexit date having been delayed until potentially October.

The last four euro benchmarks to have been launched across the past three weeks have all been very long-dated trades, of 15 or 20 years, offering less low yields and less low spreads for core names, while the last shorter new issue was a zero coupon five year for TD on 3 April. A syndicate banker away from Yorkshire’s leads suggested it was an appropriate name to bring in the shorter end of the curve.

“Five years should be open to them given that they pay a bit of spread,” he said. “Yield-wise, five years is miserable, so you need to put something on there to offer at least something like a coupon, and a five year from the UK is just the right trade.

“I don’t think Brexit will be a concern to anyone,” he added, “so I would presume they will swiftly get this executed.”

Yorkshire’s outstanding November 2022s were quoted on an i-spread basis at 8bp, mid, pre-announcement, and its April 2023s at 9.5bp, according to pre-announcement comparables circulated by the leads. Lloyds’ March 2024s, issued last month at 18bp over, were quoted at 11bp.

Unless any other euro benchmarks emerge tomorrow, Yorkshire’s trade will bring April supply to just EUR7.75bn, the slowest month this year after a bumper first quarter. According to figures from ABN Amro senior fixed income strategist Joost Beaumont, ahead of Yorkshire’s deal euro benchmark issuance is just 7% up on the first four months of last year, whereas at the end of March it was 30% ahead.

European public holidays this Wednesday (1 May), and Monday and Wednesday of next week are among several that could disrupt supply over the course of the coming month. And many banks continue to take advantage of the accommodating markets to focus on subordinated/bail-in-able trades, with issuers such as CIBC, LBBW and Rabobank among those hitting the market today and more mandated.

“Looking forward, we expect that a modest deal flow will continue on the back of favourable market conditions,” said Beaumont. “Furthermore, holidays and black-out periods might limit new issuance in the near term.

“Meanwhile, the strong supply so far this year will probably be another dampening factor, while banks might favour issuance of riskier ranks of bank debt, as new issue conditions have been very good in these markets as well. Finally, overall redemptions will be small in May, as EUR4bn of covered bond benchmarks will mature next month.”

HSBC, Lloyds, NatWest and UBS opened books for the sterling benchmark four year FRN at around 9.10 London time this morning with guidance of the Sonia plus 67bp area. An hour later they reported books above £750m, excluding joint lead manager interest, and after a further three-quarters of an hour set the coupon at Sonia plus 62bp on the back of books above £1bn, including £50m JLM interest. The final book for the £600m (EUR699m) deal was around £1.1bn good at re-offer, including £50m JLM interest.

Leeds’ deal is the latest deal in a series of UK FIG transactions, including three Sonia-linked covered bonds in the previous two weeks, which have proved largely successful in spite of the inauspicious backdrop of Brexit. On the same day that Lloyds sold the first UK euro benchmark covered bond in six months, 18 March, NatWest issued a £750m four year Sonia debut following UK parliamentary votes that raised hopes that the UK would not, at least, crash out of the EU imminently. Skipton was next to issue a Sonia FRN, followed by Virgin, although the latter trade on 22 March attracted the least demand, in excess of £850m for the £500m five year deal, which nevertheless had pricing tightened 5bp from 75bp area guidance to 70bp over.

“Leeds’ book was somewhere in between Skipton and Virgin,” said a syndicate banker away from the leads, “which is more than acceptable for a name like Leeds, given that it is relatively small and has a relatively modest senior unsecured rating, and hence a smaller potential audience.

“And they still had the ability to move 5bp. It demonstrates that the market is still in good shape.”

Indeed another syndicate banker said that the most impressive aspect of the trade was its timeline, with the issuer announcing and pricing its deal – a debut in Sonia format – by lunchtime the day after the UK parliament again failed to agree on any Brexit plan and with a potential no-deal exit looming.

“People are still able to make pretty swift investment decisions around this product for these sorts of issuers,” he added, “and the asset class continues to demonstrate a very mature status.”

The banker noted that Leeds had completed its deal during what was expected to be a five hour UK government cabinet meeting.

“That was a pretty smart move,” he said. “If they are all locked in a room together having their heads banged together by Theresa May, they are less likely than usual to come out and say something ridiculous.”

Before Lloyds’ trade today, UK issuers had not accessed the euro benchmark market since Skipton Building Society sold a EUR500m five year debut on 25 September 2018. with the lack of a Brexit deal and approaching scheduled leave date of 29 March increasing uncertainty and deterring issuance.

However, a series of UK parliamentary votes last week, including a majority of MPs being against a no-deal Brexit, has led to expectations that the UK will not leave the EU without a deal next week but rather seek an extension.

“It felt like after the votes in parliament last week the sentiment in the Street has completely changed,” said a syndicate banker at one of Lloyds’ leads. “All of a sudden we have seen a bit of a rally in UK covered bonds and some good investor interest, and it felt like the Street went from being long UK to being short.

“This change in sentiment was very encouraging, and given that in particular Friday demonstrated an extremely strong market backdrop and this morning Asia opened on a firm footing, we thought it would be the perfect time for testing this trade. We had some good feedback and decided to give it a go.”

Leads Deutsche, ING, LBBW, Lloyds and UBS went out with initial price thoughts of the 23bp over mid-swaps area for the five year euro benchmark. The lead banker said this represented a pick-up of around 9bp over fair value and was designed to be an “attractive headline number”.

This proved to be the case as demand passed EUR1.5bn in the first half hour, and three-quarters of an hour later the price was set at 18bp with books above EUR3.25bn. Demand ultimately reached some EUR4.7bn and the deal was sized at EUR1.5bn (£1.28bn)

Syndicate bankers at and away from the leads put the final new issue premium at 3bp-4bp. One said it was impossible to tell whether Lloyds might have gotten away with a smaller pick-up, even if he might have targeted a slightly tighter spread based on recent benchmarks having paid almost no new issue premiums.

“I have the impression they played it conservatively for obvious reasons,” he said. “It was a very nice trade.”

Another lead banker said the deal was not only reflective of Brexit developments, but also wider market conditions.

“It’s something that Lloyds can be proud of,” he said, “and is a great testament to how strong the whole covered bond market currently strong is. Last week already Credit Agricole Italia and BPI had fantastic execution, and it feels like at the moment everything works.”

National Westminster Bank (NatWest) added to the UK positivity with its first benchmark since the RBS group’s covered bond issuer was rebranded from its parent’s name. It did so with an inaugural Sonia-linked trade, a £750m four year year FRN via NatWest, RBC and TD.

The transaction was priced at Sonia plus 60bp, after initial guidance of the 65bp area, on the back of some £2.25bn of demand good at re-offer. A lead syndicate banker said the order book is the largest yet for any Sonia-linked trade, whether in covered bonds or SSAs.

Sonia-linked sterling covered bond issuance has continued at a steady pace in spite of the months of Brexit machinations, but the lead banker said the encouraging backdrop had, as with Lloyds, provided an appropriate window for NatWest’s dual debut.

“It was a super day all round for the UK,” he added.

He said NatWest’s sterling and Lloyds’ euro trades had come roughly flat to each other, both being attractive to investors, and suggested it made sense for NatWest to debut its rebrand and the Sonia format in sterling, while Lloyds, having been more active in its home market, would be keener to diversify.

Virgin Money should follow with a debut benchmark covered bond shortly, following an announcement today of a sterling Sonia-linked five year deal to follow investor calls and meetings in the next two days. BNP Paribas, HSBC, Lloyds, NatWest and Santander have been mandated.

The UK building society announced the mandate for its new issue yesterday, with Lloyds, NatWest, RBC and TD as leads. The deal is the first bond from a UK financial institution in any format this year.

“We are in an interesting spot around sterling execution,” said a syndicate banker at one of the leads. “The UK folks reverting to sterling transactions is probably a function of the fact that perhaps there’s a sense that UK sterling investors are kind of invested into the UK macroeconomic, Brexit and sterling risk anyway. Therefore they are probably the least likely to be hesitant compared with investors in alternative markets.

“So sterling covered bond transactions are a little bit of a rainy day-type trade for the UK issuers – as are secured markets generally for bank issuers. And therefore it’s not particularly surprising to see UK names here in the same way you are seeing European focus on covered bond issuance for the majority of transactions we’ve seen in the past couple of days.”

He said the mandate announcement received a positive response, and the leads went out with initial guidance of Sonia plus 77bp for a benchmark-sized transaction this morning. Demand peaked at over £1.2bn, enabling pricing to be tightened to 75bp and the deal to be upsized first to £750m minimum and then to an ultimate size of £1bn (EUR1.1bn).

“That’s an extremely successful outcome for a debut Sonia deal from one of the UK names,” said the lead banker. “It’s testament to being a little bit brave in stepping into the market as the first UK financial in sterling, but sensible in offering some spread concession to be as equally appealing as other covered bond markets.”

He put the new issue premium at 5bp-7bp – similar to levels seen on euro benchmarks – with Coventry and Yorkshire Building Society November 2023 Sonia FRNs in the high 60s and shorter-dated Lloyds and Santander UK three year FRNs issued last year at around 50bp over.

“Nationwide has done a fair amount of work in getting Sonia-ready,” he added, “and we’re pleased that work has paid off today with a terrific result to open the UK financials market.”

Moody’s said that while the regulatory and market environment will remain supportive for covered bonds in 2019, risks are emerging, with the possibility of a no-deal Brexit and the rise of anti-consensus political movements posing potential concerns.

While it expects an arrangement to be reached between the UK and the EU to preserve many existing arrangements, it said the probability of a no-deal Brexit has risen in recent months.

“Such an outcome would be negative for UK covered bonds because it would be negative for the UK economy and UK banking sector,” said Moody’s. “A no-deal scenario would also raise specific issues for both UK and non-UK European covered bonds.”

The rating agency goes on to say that anti-consensus political movements could threaten the broader European environment in which covered bonds have prospered, undermining the consensus necessary for policymakers to agree institutional reforms.

“Populist political movements could also foster new credit risks in cover pools,” it adds, “for example if politicians decide to be more accommodating to borrowers in times of stress.”

Scope echoes Moody’s broader concerns, warning that rather than underlying economic developments, “populist and nationally-focused strongman leaders” will move markets. However, the rating agency notes that in such an environment the stable credit profile of covered bonds should make them a preferred investment.

Fitch also points out that although the country with the most immediate headline risk – the UK – is the only sovereign on negative outlook among countries where it rates covered bonds, the 11 programmes it rates are on stable outlook.

“UK covered bonds’ relative insensitivity to the effect of Brexit is because issuers’ ratings can withstand a moderate deterioration in their operating environment and most UK covered bonds have a cushion against their issuer’s downgrade,” said the rating agency. “In addition, issuers maintain large OC (overcollateralisation) buffers that could mitigate an increase in credit or refinancing risks for the programmes.”

The three aforementioned rating agencies all forecast stable ratings for covered bonds. Of 110 programmes Fitch rates, for example, 90.9% have a stable outlook, 7.3% a positive outlook, and only 1.9% have a negative outlook or are on Rating Watch Negative.

Scope notes that the bank ratings supporting triple-A ratings for the asset class are stable and in places improving, although it notes that conduct and governance-related events – such as loose anti-money laundering controls and tax fraud – could result in headline risk and even rating pressures.

The European Central Bank’s anticipated measures are central to any 2019 forecast and, according to Moody’s, interest rates will increase at a modest pace next year as the ECB gradually unwinds the stimulus provided under its quantitative easing policy.

“Overall, we expect this market environment of gradually rising rates to be supportive for European banks and therefore their covered bonds,” it said. “However, the possibility of a sharp and sudden rise in interest rates is a risk, particularly for banks in countries with high levels of debt.”

Regulatory developments and notably the EU covered bond harmonisation package are expected to be supportive of covered bond credit quality in 2019 (as covered widely already in this publication). However, Moody’s notes that some of the credit consequences will depend on choices to be made at the national level.

Scope expects a “race” between countries to become the first fully harmonised jurisdiction and to issue the first Premium Covered Bond, with the first such transactions appearing at the end of the year.

Norwegian and Canadian covered bonds should benefit from an IDR uplift of two notches at Fitch, increasing their buffer against issuer rating downgrades, thanks to the implementation of senior debt bail-in in their resolution framework this year.

Note: Fitch, Moody’s and Scope have all published special 2019 outlook covered bond research, whereas DBRS and S&P have not yet done so.

TSB had on Tuesday announced plans for a Sonia-indexed trade to be launched after investor meetings, following successful deals last week from building societies Coventry and Yorkshire.

Leads Lloyds, NatWest, Nomura and Sabadell then opened books for the five year floating rate note this morning with guidance of the 65bp area – Coventry’s and Yorkshire’s deals were both priced at 60bp over following IPTs of the 65bp area and 63bp area, respectively, on Tuesday and Friday of last week.

The deal’s launch came in the wake of a draft agreement between the UK and EU being reached yesterday (Wednesday), with UK prime minister Theresa May yesterday evening apparently winning the backing of her cabinet.

However, although markets opened relatively stable this morning, the UK’s Brexit Secretary, Dominic Raab (pictured), resigned minutes after TSB announced its launch, prompting negative moves in sterling and other markets.

“After many UK cabinet members resigned, the markets turned down into red territory very quickly, with the Bund flying and with credit indices widening sharply,” said one banker.

The UK issuer then said that due to newsflow it would postpone its transaction, thanking investors for their interest.

Syndicate bankers away from the deal said that the move was only to be expected in light of the circumstances, although one questioned the wisdom of hoping to launch the trade today.

“Maybe they think things will get worse,” he suggested.

Danske Mortgage Bank, the Danish group’s new Finnish issuer, nevertheless overcame the difficult market conditions and recent challenges of the group’s own to price a EUR750m five year covered bond today that bankers deemed a success.

The Danish group has been at the centre of a money-laundering scandal and its spreads widened sharply in early September on the back of revelations arising in relation to its Estonian branch and Russian money.

Yesterday a mandate was announced for a five year euro benchmark from Danske Mortgage Bank plc, which replaced Danske Bank plc in Finland as the group’s Finnish issuer. The deal is the first Danske Finnish euro benchmark since November 2015.

A syndicate banker at one of the leads said they received much positive feedback in the wake of the mandate announcement, and leads BNP Paribas, Danske, Natixis, NatWest and UniCredit this morning went out with guidance of the mid-swaps plus 10bp area for the five year deal. After an hour they had taken over EUR1bn of orders, excluding joint lead manager interest.

The spread was then set at 7bp over and the size at EUR750m – the top end of the issuer’s target – around three-quarters of an hour later, with books above EUR1.3bn, and by the time books were closed after a total of two and a quarter hours some EUR1.5bn of orders were good at re-offer, according to the lead banker.

He said that working out fair value was difficult because other Finnish paper from Nordea and OP is squeezed and hence trades at quite tight levels. He said a successful and large EUR1.75bn five year trade for Norway’s DNB at 5bp over last week was a recent and relevant reference point, and that a combination of the Norwegian trade and the Finnish outstandings suggested fair value was around 2bp, meaning the final new issue premium paid by Danske was up to 5bp.

A syndicate banker away from the leads said that based on Finnish secondaries the new issue premium was around 7bp, and had been as much as 10bp at the starting guidance, but that the transaction had overall gone well.

“It’s a five year bond out of the Finnish entity, so still within the scope of the CBPP3, and it offers quite a nice headline number,” he added.

The lead syndicate banker said the covered bond option was a sensible choice for Danske, with the Finnish nature of the trade also proving reassuring for investors, while the name also had some scarcity value, with Danske globally not having issued a euro benchmark since last year.

“Given the name, given the current market, given DNB’s outcome last week, printing EUR750m two times done at 7bp was a good result for everyone,” he said.

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