Following a mandate announcement yesterday (Monday), Yorkshire Building Society (YBS) leads Danske, HSBC, LBBW, Natixis and Nomura this morning went out with initial guidance of the mid-swaps plus 14bp area for the €500m (£428m) no-grow seven year social covered bond, expected ratings triple-A. After an hour and 40 minutes, they reported books above €1bn, including €155m in joint lead manager interest. After three hours and 10 minutes, guidance was revised to plus 10bp+/-1bp, will price in range, on the back of books above €1.45bn. The spread was ultimately fixed at plus 9bp and the final books was around €1.3bn, including €155m in JLM interest.

A lead syndicate banker said the trade went very strongly, citing the lack of UK supply and the rarity of it being a social covered bond as factors in its success. Only two previous UK euro benchmark covered bonds have been issued this year, a €500m 20 year from Nationwide Building Society in April and a €750m seven year for Coventry Building Society in July.

“It was clear from the outset when we opened books early this morning that there was quite a good interest,” added the lead banker. “We never know exactly how much of that interest will come into the books, but this time around, it was relatively quick.”

A banker away from the leads agreed the transaction “ticked all the boxes”.

“They made a 5bp move, which is rather at the aggressive end,” he added, “but other than that, it seems rock solid.”

According to pre-announcement comparables circulated by the leads yesterday, YBS May 2024s were quoted at 6bp, mid, and its October 2027s at 8bp. The lead banker put fair value for the new seven year issue in the context of 8bp-9bp, but said that a degree of price discovery was involved.

“We didn’t have 100% clarity about exactly where the queue would be for investors,” he said. “Hence the ever so slightly cautious way of going into the market – unlike a German Pfandbrief where everybody knows exactly where they price, who knows exactly where to pinpoint the price for a UK building society with a social?”

The revised guidance of 10bp+/-1bp gave investors clarity, added the lead banker, while allowing for the 9bp level to be tested on the back of a book of close to €1.5bn.

“So a very strong book, with good quality accounts and widespread distribution,” he said, “therefore it was definitely a plus 9bp trade for the issuer on the day.”

The lead banker noted that although some investors no longer buy UK covered bonds after Brexit, many others are happy to, while ESG accounts bolstered demand.

Crédit Agricole announced the mandate for its social covered bond on Tuesday, with investor calls scheduled for Wednesday. Then yesterday morning, leads BBVA, Commerzbank, Crédit Agricole, Danske, LBBW, Santander and SG went out with guidance of the 5bp area for the July 2028 euro benchmark, with expected Aaa/AAA/AAA ratings (Moody’s/Fitch/S&P).

After around an hour and a quarter, the leads reported books above €1bn, excluding joint lead manager interest, and after three hours, they fixed the size at €1bn on the back of more than €1.8bn of demand excluding JLM interest. After three hours and 25 minutes, guidance was revised to 2bp+/-1bp, will price in range, with the book at €2bn, excluding JLM interest, and the deal was ultimately priced at 2bp, with the final book above €1.6bn, excluding JLM interest.

A lead syndicate banker said the deal went very well, citing the level of demand and the final spread, which he said was only 1bp-2bp wide of fair value.

“It was quite good to be able to demonstrate quite quickly that we had €1bn in the book,” he said.

The decision to then provide the next update with the latest book size and final issue size was “a bit unconventional”, he said. While the update showed that there was substantial interest in the transaction, it was also aimed at giving clarity to investors that the issuer was not seeking more than €1bn, with Crédit Agricole having raised anything from €1bn to €2bn in its benchmarks in recent years. He said some investors had asked about the size, and it was particularly important to provide reassurance “when the covered bond market is not the strongest, having recently undergone a repricing”.

According to comparables circulated by the leads, Crédit Agricole paper from May 2027 to December 2029 – the latter a green bond – was all trading at minus 1bp, mid. However, the lead banker said that – with Crédit Agricole’s last euro benchmark having been in April 2020 and its curve squeezed, fair value based on the secondaries of compatriots BPCE and Caffil, who have been more active, was around mid-swaps flat to plus 1bp, with many investors concurring.

“It would have been possible to print €1bn at plus 1bp, but it would not have been a successful debut in social format by CASA’s standards,” he added. “There was clearly investor sensitivity at plus 3bp, and even more so at 2bp.

“Investors said that they wanted bonds, but there was only so much they could accept.”

He said that although the overall make-up of the book was not substantially different from that a non-social covered bond would have achieved, this had been the case on other core Eurozone covered bonds in green or social format, but also that some orders would not have been placed or been so large had it not been for the social format.

Following the announcement of Coventry Building Society’s mandate on Wednesday, leads Lloyds, Natixis, Santander, UBS and UniCredit went out with guidance of the mid-swaps plus 17bp area for the seven year euro benchmark-sized transaction. The spread was subsequently set at 14bp on the back of books above €1bn, and a €750m (£645m) deal was ultimately priced on the back of some €1.3bn of demand.

A syndicate banker at one of the leads said the execution was smooth and in line with expectations, with the 3bp tightening and level of demand commensurate with current trends.

“We chose the seven year maturity because longer dated issues have proven more challenging of late, with more people wanting to be in the intermediate part of the curve,” he added, “and for Coventry this was about getting as broad a following as possible in the euro market.”

He said the order book may have grown in size more slowly than some CBPP3-eligible trades, but attributed this to the lack of an ECB order.

“In the end the book reached €1.3bn,” he added, “and we had a very good breadth of orders.”

Germany and Austria were allocated 44%, the Nordics 17%, the UK and Ireland 16%, the Benelux 9%, France 6%, Asia-Pacific 5%, and Switzerland 3%. Funds took 44%, banks 33%, central banks and official institutions 15%, and insurance companies and pension funds 8%.

The lead banker said that interest from bank treasuries was encouraging, in being higher than in some recent trades, with the higher spread than on CBPP3-eligble issuance contributing to this. He noted that this demand came in spite of ongoing uncertainty over the post-Brexit treatment of UK covered bonds.

“The UK curve still trades wider than it should,” he added.

He nevertheless noted some price sensitivity among investors. The leads put the new issue premium at 2bp, with Coventry June 2026s bid at around 11.5bp-12bp over.

Coventry’s last euro benchmark was a €500m seven year in June 2019 and the lead banker said the announcement the day before launch gave investors time to reacquaint themselves with the credit.

The €750m size is the largest euro benchmark covered bond Coventry has issued, its previous largest having been a €650m three year in 2014.

The sterling deal comes shortly after Lloyds Bank inaugurated the SONIA-linked sterling covered bond segment with a £750m three year issue on Wednesday. The euro deal is meanwhile the first euro benchmark covered bond from the UK since May.

Following a mandate announcement yesterday (Monday) afternoon, the sterling tranche of Santander UK’s deal was launched this morning by leads Deutsche, NatWest, RBC, Santander and TD with guidance of the SONIA plus 45bp area.

The euro tranche was at the same time launched by HSBC, LBBW, Natixis, Santander and UBS with guidance of the mid-swaps plus 12bp area.

After around one hour, the leads announced the books were over £500m and EUR500m, respectively. Just under two hours after launch, they announced the books were over £1bn, including £125m joint lead manager interest, and EUR1bn, excluding JLM interest.

The spread of the sterling tranche was subsequently set at 43bp and the size at £1bn with books at £1.25bn, including the £125m JLM interest. The final book stood at over £1.2bn, excluding JLMs.

The spread of the euro tranche was set at 10bp and the size at EUR1bn, with books approaching EUR1.5bn, excluding JLM interest. The final book stood at over EUR1.6bn, excluding JLMs.

The deal’s combined size of EUR2.12bn equivalent makes it the largest in the covered bond space since May 2017, when Rabobank sold a EUR2.5bn dual tranche deal.

“It’s pretty unusual to see a dual tranche, dual currency execution in the covered space, but it was a very good outcome here in that both tranches generated strong demand,” said a syndicate banker that worked on one of the tranches.

A syndicate banker away from the leads agreed.

“Taking EUR1bn and £1bn out of the covered bond market is a pretty good day at the office,” he said.

Lloyds’ debut SONIA deal last week was only the second benchmark bond linked to SONIA since the rate was put forward by the Bank of England as a replacement for Libor. It followed a £1bn five year FRN for the European Investment Bank (EIB) that pioneered the structure in June.

As with the deals that preceded it, the coupon of Santander UK’s deal will be determined by compounding the backwards-looking SONIA daily, rather than by using Libor, which will be phased out of the sterling bond market by 2022.

Lloyds’ £750m three year issue was also priced at 43bp over SONIA down from initial guidance of the 45bp area, on the back of more than £1.4bn of orders.

“It’s interesting that Santander priced the deal at the same spread as the Lloyds trade – which I think is a good endorsement of the Santander UK credit – and were also able to get the larger deal size,” said a syndicate banker at one of the sterling leads. “I think that shows that market capacity is developing as more people get more comfortable with the notion that SONIA instruments aren’t going to have any different characteristics in terms of size or trading volume or liquidity compared with the Libor notes.

“We saw more new investors get engaged this time around that hadn’t participated in a SONIA transaction before.”

Syndicate bankers said the deal offered a 2bp concession at most for the new structure, estimating that an equivalent Libor-linked trade for Santander UK would have been priced at around 25bp-27bp over three month Libor and noting that the basis swap between SONIA and three month Libor was around 16bp.

In contrast, the euro tranche was deemed by bankers to have paid a new issue premium of 7bp-8bp, based on the mid side of Santander UK’s curve, which they noted is more than most recent deals.

Syndicate bankers away from the leads said the approach was pragmatic and reflected that euro-denominated deals from UK banks have met mixed receptions over recent months, with Brexit looming.

“I think there is a recognition that deals from UK names maybe need to be a bit more of a no-brainer investment from the get-go if you’re going to generate sufficient levels of enthusiasm to have the option of printing a decent size,” said one.

Bankers said demand for the euro tranche was also supported by a recent lack of euro-denominated issuance from the UK. Only three euro benchmark covered bonds have been sold by UK issuers this year – totalling EUR2.5bn supply. Santander UK’s last euro benchmark covered bond was a EUR1bn seven year on 4 January.

Nationwide announced a mandate this morning for a euro benchmark seven year covered bond, via leads HSBC, Lloyds, Nomura and Société Générale, and said it would also consider a 15 year tranche by reverse enquiry.

Books for the seven year issue were opened with guidance of the 14bp over mid-swaps area. After two hours, guidance was revised to the 12bp area with books in excess of Eu1.6bn, for an expected deal size of Eu1bn. The spread was then fixed at 11bp and the size at Eu1bn.

“It’s a very good result, and I think it reflects that investors believe that no matter what happens with Brexit, they are still safe with a product like this,” said a banker away from the deal. “If you compare this to recent trades like BNPP’s long seven year yesterday, priced at minus 3bp, Nationwide’s deal is so much more attractive.

“I don’t see any reason why you would not sink your teeth into this.”

The 15 year tranche did not emerge, and a banker at one of the leads said Nationwide had decided against launching the tranche.

“Indications shown seemed more reflective of external factors than the fair value of Nationwide Building Society’s covered bonds,” he said.

Bankers away from the leads said the move should not be interpreted negatively.

“I don’t view this as a bad thing,” said another banker away from the deal. “They got the seven year done and very solidly oversubscribed, and it looks like they just decided that there wasn’t enough interest in the 15 year at the price they wanted.”

The new issue is only the fourth benchmark covered bond from a UK issuer since the Brexit referendum last June and only the second denominated in euros, following a Eu500m seven year issue for Coventry Building Society on 5 January. In the run-up to and aftermath of the vote, UK covered bond spreads widened beyond those from countries such as Canada and Australia, and issuers’ funding needs were reduced by the launch of the Bank of England’s Term Funding Scheme (TFS) in August.

Nationwide’s last benchmark covered bond was a £750m three year floating rate note in April 2016, and its last euro issue a Eu1.25bn short five year issue last February.

“There’s not been much UK supply coming and there’s not much expected, but it’s still reassuring to see that appetite for UK assets is still very high, and in particular that continental European investors are still keen to buy euro-denominated UK assets,” said a syndicate banker. “All in all it’s a good signal.”

The seven year deal was seen as offering a new issue premium of around 3bp-4bp, with bankers seeing Nationwide’s October 2021s at 1bp, mid, October 2021s at 3.5bp, and March 2027s at 13.5bp. They also cited Coventry Building Society’s recent January 2024 issue at 13bp, mid, noting that Nationwide’s outstandings trade around 6bp inside Coventry’s at the shorter end of the curve.

“That’s a pretty good, small premium for a UK name, if you consider the Brexit factor,” said a banker away from the leads.

Bankers estimated that a new seven year euro benchmark for a Canadian issuer would have today been priced around 8bp tighter than Nationwide’s deal, noting this differential has decreased from the peak of post-Brexit widening, when UK covered bond spreads were some 15bp back of Canadian spreads. The last euro benchmark from Canada was a Eu1.25bn five year for Bank of Nova Scotia on 9 January, which was priced at 4bp and seen trading at minus 3bp, mid.

“I think that differential will tighten further over time, simply because supply expectations for from Canada are much higher than the UK,” added one. “The UK used to trade 5bp inside the Canadians, so maybe they will be able to claw their way back to those levels.”

The Eu500m (£425m) deal on 5 January was Coventry’s first euro benchmark covered bond since October 2014, while the issuer’s last benchmark was a £500m three year FRN in March 2015.

Kris Gozra, head of capital markets at Coventry Building Society, told The CBR that the issuer began preparing its comeback having decided that it was “long overdue” a return to the market.

After taking part in meetings with market participants in Germany in September, to discuss the future of the UK market in light of Brexit, Coventry Building Society then held a European roadshow ahead of a potential euro benchmark issue at the end of November. However, the transaction was postponed as market conditions worsened into the end of the year.

“We looked at getting a deal away in 2016, but what happened then was the Italian referendum,” Gozra said. “Given the reaction to the referendum, and with a noticeable slowdown in CBPP3 purchases spooking some people in the lead up to the referendum, we decided not to go that side of Christmas.”

After markets opened positively at the start of the year, Coventry was encouraged to push forward, he said. The issuer announced a mandate for a Eu500m no-grow seven year covered bond on the second day of market activity, 4 January, and hit the market the next day.

“Having done the roadshow we were confident, but it’s fair to say that the trade wasn’t without risk,” Gozra said. “Until we went for it, there was no way of knowing how many investors could do a UK name and how many couldn’t – there would definitely be some names who’d bought into us before who wouldn’t this time around, the question was how many.

“What we found in the end is we had a pretty healthy reception.”

Leads Commerzbank, Danske, HSBC and Natixis priced the deal on 5 January at 18bp over mid-swaps, down from initial guidance of the 20bp area, on the back of over Eu950m of orders.

Some 64 investors were in the final book, with banks allocated 39% of the deal, asset managers 34%, central banks and official institutions 21%, insurance companies and pension funds 5%, and others 1%. Accounts from Germany and Austria took 38%, the Nordics 22%, the UK and Ireland 12%, Asia 10%, France 8%, the Netherlands 6%, and Switzerland 4%.

“Even when it became obvious we would be the first UK issuer back in the market, we felt we were a good candidate – being a well-regarded credit with stable ratings, a good credit story, and a very well understood, simple business model,” Gozra added. “The strength of the order book proved that this was the case.”

Coventry’s deal was the first UK euro-denominated benchmark since the Brexit vote in June, with the last previous having been a Eu500m four year issue for Leeds Building Society in April.

After some frontloading of supply at the start of 2016, UK issuance activity wound down in the run up to the country’s EU referendum on 23 June. The uncertainty that followed the vote to leave then kept many issuers quiet, then the Bank of England announced its related Term Funding Scheme (TFS) in August. The TFS, which allows banks to borrow reserves in exchange for eligible collateral, reduced UK issuers’ funding needs and further stymied supply.

Prior to Coventry’s return, only one benchmark covered bond in any format had been sold out of the UK after the Brexit vote – a £500m three year for Santander UK in July – and none since the launch of the TFS.

“In a way, the TFS is almost tailor-made for a name like ourselves,” Gozra said, “because Coventry Building Society grows on average 10% per year and with that kind of growth you can get a considerable allowance under the TFS.

“We decided, however, that there was no way we could just be absent from the wholesale markets, as we’d worked quite hard to build up a franchise. When you have that franchise people expect you to return to the markets on a semi-regular basis, and you need to maintain your investor community and credit lines.”

Gozra added that the all in cost of an equivalent sterling covered bond would have been “considerably cheaper” for Coventry, but said a euro benchmark was more appropriate for such a “relationship trade” aimed at European investors.

“We could have priced the deal tighter than we did, too,” he added, “but as we saw this as a relationship trade, not a funding trade, that would have been counterproductive. This deal was always about sending a message.”

Gozra expects Coventry Building Society to return to the covered bond market in the next 12-18 months.

“Some of our wholesale issuance will inevitably be displaced by the TFS,” he said, “but I’d expect us to be back in the wholesale markets again soon, be it in the euro market or the sterling market, if the market opportunity exists.”

Coventry Building Society began a roadshow on Friday ahead of a potential Eu500m no-grow seven year covered bond issue. The roadshow will conclude on Wednesday, and a syndicate banker at one of leads Commerzbank, Danske, HSBC and Natixis said the deal could be launched on Thursday or Friday, subject to market conditions.

The new issue will be the first euro benchmark covered bond from the UK since the Brexit referendum on 23 June, with the last having been a Eu500m four year issue for Leeds Building Society in April. Only one benchmark covered bond has been sold out of the UK since, a £500m (Eu589m) three year floating rate note for Santander UK on 1 July.

Bankers suggested that the lack of supply was a result of issuers’ reluctance to print new issues at spread levels that had widened on the back of Brexit concerns, and on anticipated lower demand for UK paper given uncertainty about the direction of the market and the future regulatory treatment of the UK product.

“UK covered bonds have taken quite a ride since the Brexit vote,” said one. “Given the many questions that are yet to be answered about how and when the UK will leave the union, it is also understandable that issuers have not rushed to get involved even as spreads have come back down.

“In that context, Coventry’s deal will be an important test.”

UK covered bond spreads widened substantially in the aftermath of the Brexit result, but by August had already retraced such moves, as spreads from all jurisdictions tightened over the summer on the back of a supply drought.

“As risk markets came to think that things were not as bad as first feared, UK covered bond spreads came back in and tightened in conjunction with other jurisdictions, such as the Canadians, which are probably one of the most sensible comparables for UK names post-Brexit,” said a banker at one of Coventry’s leads.

“This tightening trend lasted until quite recently, when a back-up in spreads began as yields hit new lows and some investors started backing away. With the higher yields we’ve seen in the last few weeks there’s been a general buyer strike, and spreads for all jurisdictions have widened by anything between 3bp-5bp.”

These moves have left UK covered bonds now at slightly tighter levels than pre-Brexit, trading roughly in line with those of Australia, but still wider than peers from Canada and the Nordics.

UK covered bonds are now quoted around 20bp-30bp inside Spanish and Italian covered bonds, having been in line with such peripheral paper until the recent widening that followed the US election result – which saw peripherals hit hardest of all.

Bankers at Coventry’s leads saw the issuer’s November 2021s quoted at 10bp, mid. They also cited as comparables Lloyds April 2023s, at 10.5bp, and Nationwide October 2021s at 8bp, October 2022s at 10bp and March 2027s at 15.5bp.

Furthermore, analysts have played down the potential impact of the UK’s exit from the EU on the regulatory treatment of UK covered bonds.

Analysts at Commerzbank noted that should the UK also leave the EEA, it may lose some privileges according to the UCITS Directive, CRR and LCR. However, they noted that UK covered bonds’ eligibility for ECB repo should be untouched.

“On balance this would be comparable to the regulatory status of Canadian covered bonds, which nevertheless typically benefit from healthy demand,” they said. “In addition we could imagine that, by the time the Brexit negotiations have been concluded, new EU measures for improved mutual regulatory recognition with third countries may be initiated as part of the planned covered bond harmonisation.

“These should also benefit UK covered bonds.”

Michael Spies, covered bond and SSA strategist at Citi, agreed.

“In a worst case scenario we think investors will have to treat UK covered bonds in line with Canadian covered bonds from a regulatory point of view, i.e. slightly superior to Australian covered bonds,” he said. “This was the main reason we viewed UK covered bonds as trading too cheap versus main peers during recent months.”

Spies added that UK cover pools’ credit qualities were substantially higher than the overall market average before the vote, and said that that cover pool risks are limited given that the UK housing market “barely moved” following the outcome and considering GDP growth projections.

Analysts also noted that UK covered bond ratings are expected to be unaffected by Brexit, owing to high rating buffers.

Spies said the upcoming deal could be seen as “a test balloon” for investor demand for UK paper.

“As noted, we continue to like UK covered bonds but the first UK covered bond issuance after seven months in a relatively illiquid market has the potential to reprice the whole segment – to the good and to the bad,” he said.

Eagle Place Covered Bonds LLP, Eagle Place Covered Bonds Finance Ltd and Eagle Place Covered Bonds (Holdings) Ltd were incorporated on Wednesday of last week (27 July). The companies take their name from the address of a flagship Virgin Money office in London at 1 Eagle Place.

A spokesperson for Virgin Money confirmed that the move is part of the bank’s preparations. Virgin Money said in its 2015 annual report that it plans to “further improve wholesale [funding] diversification by issuing covered bonds in 2016” – the spokesperson said that no further details regarding timing are available.

Mortgages are Virgin Money’s core business, comprising 93% of its lending as of 30 June, with balances totalling £27.7bn (Eu33bn). Its gross mortgage lending in the first half of the year was 19% higher than a year previously, while it previously grew its book through the acquisition of mortgages from Northern Rock Asset Management/NRAM, after having earlier acquired parts of the failed UK lender.

Northern Rock-originated mortgages have been included in Virgin Money’s Gosforth Funding RMBS issuance alongside own-originated mortgages. Its most recent RMBS was Gosforth Funding 2016-2 in May.

Virgin Money’s move into covered bonds comes after TSB in May incorporated covered bond companies as part of its preparations to enter the market.

Photo: Virgin Money

The rating agency said that the UK leaving the EU would not directly affect its analysis of the underlying collateral backing UK covered bond programmes. Regarding mortgage-backed issuance, S&P noted that it already factors into its analysis the potential for a decrease in house prices given that it considers UK residential property to be significantly overvalued. It added that for two public sector programmes – backed by loans to local authorities and to social housing associations – Brexit would have no direct consequences on the vast majority of the cover assets.

Regarding sterling, S&P said that while it could fall sharply, all the programmes it rates either have issuance exclusively in the UK currency or are fully hedged against such currency risk.

The rating agency also said that unused notches of uplift under its analysis of UK programmes means that a sovereign downgrade of up to two notches would not in and of itself directly affect its covered bond ratings.

S&P noted that its criteria take into account the preferential status enjoyed by covered bonds under the EU Bank Recovery & Resolution Directive (BRRD), but said that this directive has been transposed into UK laws and regulation and that it does not foresee Brexit leading to a change in this mechanism for UK banks.

Under UK legislation large banking groups have to ring-fence their domestic retail banking activities and Santander UK has as part of this started realigning the wholesale funding structure of its operating companies, Santander UK plc and Abbey National Treasury Services plc (ANTS).

Previously, covered bonds as well as senior unsecured notes, structured notes and short term funding have been issued by ANTS and guaranteed by Santander UK. As of 1 June, the covered bonds and senior unsecured notes will have Santander UK as issuer, with the covered bonds still benefiting from a secured guarantee from Abbey Covered Bonds LLP.

Fitch yesterday (Wednesday) said that there will be no rating impact on Abbey’s covered bonds from the planned substitution. They are rated AAA, on stable outlook. The rating agency noted that the interest rate swap on the cover pool was novated from Abbey to Santander UK on 30 March.

As outlined in a first quarter investor update, the covered bond move comes amid wider changes to the group’s funding against a backdrop of regulatory changes affecting banks’ structures.

“Going forward, Santander UK plc will be the OpCo issuer in the Santander UK Group and will issue senior unsecured and covered bonds,” it said. “Santander UK Group Holdings plc will be the issuer of subordinated debt and MREL/TLAC-eligible senior unsecured debt.”

Six euro benchmark covered bonds totalling Eu5bn were sold this week, of which bankers said Leeds Building Society’s debut euro benchmark covered bond was the highlight.

“It’s been a very productive week,” said one. “Everything’s gone well at the least, and some – namely Leeds – were very impressive.”

Leeds Building Society leads Danske, HSBC, Natixis and UBS priced the Eu500m no-grow four year issue at 27bp over mid-swaps, after having launched the deal with initial guidance of the 30bp area. The book closed at over Eu1.3bn from more than 70 accounts.

“It was a very decent result,” said a syndicate official away from the leads.

Syndicate officials at and away from the leads said the size and quality of the order book showed that investors are still confident in buying UK names, in spite of concerns over the consequences of a possible UK exit from the EU, after a referendum on the country’s membership on 23 June.

Paul Riley, director of treasury at Leeds Building Society, said that the deal went very well.

“We had planned our entry to the euro covered bond market for some time and having recently posted excellent financial results we felt timing was good,” he told The CBR. “We were mindful of Brexit, but used the investor roadshow to test sentiment.

“Pricing was in line with my expectations,” he added, “but the execution and demand exceeded my expectations.”

Syndicate officials noted that non-domestic participation was particularly high.

Accounts from Germany and Austria were allocated 43% of the deal, the Nordics 20%, the UK 12%, the Benelux 11%, Switzerland 3%, other Europe 10%, and others 1%. Banks took 35%, central banks and official institutions 28%, fund managers 24%, and insurance companies and pension funds 13%.

“We keep talking about these deals becoming more challenging,” said a syndicate official, “but it isn’t happening.”

Bankers said the deal proved popular in part because it offered a relatively attractive spread and yield – of 0.208% – at the shorter end of the curve. The deal is the first non-German euro benchmark covered bond with a maturity shorter than five years since 21 January, when Crédit Agricole sold a Eu1.5bn long four year OH.

“This was a rare chance for investors to get some good yield at the short end,” said one. “The maturity, the price – it seems the issuer and leads got everything right with this one.”

Leeds had previously issued covered bonds in sterling.

“Developing our funding franchise into the euro covered bond market is an important strategic move to increase diversification and improve execution,” said Riley.

Leeds’ deal was launched on the same day as a £400m 10 year senior unsecured issue for Yorkshire Building Society, and following a £750m three year floating rate note covered bond for Nationwide Building Society on Wednesday.

Syndicate officials noted that the further supply from UK building societies had also been well received. Yorkshire’s senior issue yesterday attracted over £1bn of demand from more than 115 accounts and was priced at 210bp over Gilts, down from initial price thoughts of the 220bp area.

“It was a great day for the two, a great week for the UK building societies and probably the reason why UK Financials yesterday outperformed, as some of the shorts out there got ‘squeezed’,” said a banker.

Nationwide’s £750m three year FRN on Wednesday attracted orders of £1.1bn and is the joint-largest sterling deal of the year, alongside a deal of the same size and tenor from Lloyds on 5 January.

Nationwide’s deal also ended a run of widening spreads in the benchmark sterling covered bond market, pricing inside the last deal – a £250m three year FRN for CIBC priced at 52bp on 3 March – after each issue launched after Lloyds’ had been priced wider than the one before.

“It all shows that investors are still comfortable with UK names, but besides that, building societies are generally a good model for overall bank risk, and it shows people are confident in that,” said a syndicate official away from the deals. “In terms of Leeds and Yorkshire, it is also good to see the smaller names well supported.

“Overall I remain very confident on this sector.”

Syndicate officials said the pipeline for further covered bond supply next week looks relatively clear, noting that many issuers – including Nordic and French names – will be entering blackout periods.

“It has been an encouraging week all round, so I think there will be some more activity, but there is not much lined up so far,” said one.

Another banker agreed, adding that reduced issuance would allow recent heavy supply to be digested.

“Our traders are happy that today has been quieter on the primary side, as it will allow the secondary market to pick-up after not much activity,” he said.

The banker said that recent longer-dated paper was well bid this morning, particularly a Eu2.25bn 15 year ABN Amro issue sold on Wednesday of last week.

Vakifbank will today (Friday) complete a European roadshow ahead of a potential first Turkish euro-denominated mortgage-backed covered bond, but will give investors around two weeks to finish credit work before entering the market if a deal does indeed follow, according to an official at the issuer.

The Mortgage Society of Finland is set to go on the road from Monday to Thursday (22 April) ahead of a potential euro-denominated covered bond debut, a Eu250m issue, but a syndicate official at one of the leads said the deal may also not be launched immediately upon on the conclusion of the roadshow.