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FIGCovered Bonds

Best Bank for ALM and Libor Transition Management: NatWest Markets

Some things in life, like tax returns for example, aren’t exactly glamorous, but they have to be done as the downsides of getting them wrong are just too great. So, it is with maintaining existing covered bond programmes, in particular transitioning them to the new risk free rate benchmarks and managing their liability structures. When the downsides are big, banks need to be able to turn to an adviser that they trust and, according to GlobalCapital’s survey of market participants, this year that bank, the Best Bank for ALM and Libor Transition Management, is NatWest Markets.

Part of the reason for NatWest Markets’ strength in the Libor transition market is that they started taking it seriously early on. Back in 2019 they undertook the first ever Libor transition exercise and, whilst it was for a corporate rather than a covered bond, it was always designed to serve as a blue print for subsequent transactions in other sectors.

Underlying their approach since that first transaction has been a search for fair treatment for all stakeholders, “what we focus on is finding a solution that works for all participants” according to Al-Mustafa Mahmoud, liability management, syndicate, capital markets. That is based on the principal of no transfer of value – that no one gains and no one loses from the transition.

What we focus on is finding a solution that works for all participants
Al-Mustafa Mahmoud, liability management, syndicate, capital markets

But finding out how to do that, for all different classes of investors isn’t straightforward. NatWest Markets have gone through an extensive exercise of talking to and educating all classes of investors, as Mahmoud puts it “we took a lot of time, on dozens and dozens of investor calls”. Those investors are diverse, from traditional UK fund managers to Asian central banks and they all have different needs. Some investors – such as bank treasuries - are naturally better educated about the topic, others less so. According to Jacob Gilbert, director in flow syndicate, capital markets: “The area where we really stand out is investor colour…we go in methodical fashion through the broad investor base”.

NatWest Markets’ approach isn’t just about cleaning up legacy deals but also about putting in place a structure that can also be used for future programmes and, in the ultimate accolade, their approach to Libor transition has “been used by the broader market including for transactions we haven’t been involved in,” says Gilbert.

Maintaining established covered bond programmes isn’t just about Libor replacement though. Another aspect that NatWest Markets has helped their clients with has been managing the profiles of their outstanding liabilities, more often than not that has been about reducing outstanding funding for issuers with plenty of access to cheaper alternative sources of funding.

The covered bond tender that NatWest Markets managed for Nationwide Building Society last September was a textbook example. Nationwide was able to buy back their targeted £2bn of covered bond funding, targeting an impressive 11 benchmark covered bonds in euros and sterling.

The topic of treating investors fairly was again paramount.

In a market short of supply, and for a tender without a simultaneous new issue, NatWest Markets realised optimal execution required bringing the transaction to market at the right time for investors. According to Mahmoud, “covered bond investors were looking at the exercise as a liquidity event with a focus on other supply in the market”. This doesn’t just mean competing covered bond supply, but also how the bonds being bought back compared on a relative value basis to SSA supply in the tender window.

Another important aspect of getting the tender right according to Jacob was ensuring that the remaining bonds would remain liquid and eligible investments for all investors. NatWest Markets advised that purchases of any one of the 11 bonds tendered should be capped to ensure that a residual of at least €500m, or equivalent, should be left outstanding to ensure liquidity and ongoing index eligibility.

Managing Libor transitions and bond buybacks requires many things. Gilbert adds that a close dialogue with the derivatives team – who have always been at the forefront of risk free rate reform discussion and some of whom are permanently situated on the advisery ‘private’ side – is vital, as is the extensive investor work that NatWest Markets has undertaken.

Ultimately these skills are about de-risking the transaction for the client and ensuring a smooth and fair execution process. It’s the comfort that NatWest Markets are able to provide issuers when they have to undertake these exercises that has made the issuers and investors vote for them as GlobalCapital’s Best Bank for Covered Bond ALM and Libor Transition Management.