Covered bonds fit well with Nationwide’s duration ambitions

Nationwide Building Society has become a regular issuer across the wholesale markets, looking for greater diversification and duration in its funding. It has even moved its funding team down to London to help with the process. Joe McDevitt finds out about its progress.

  • 26 Sep 2012
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There can hardly be a more quintessential piece of City real estate than Threadneedle Street, EC2. Slap bang in the middle of the Square Mile, flanked by the Bank of England and the Royal Exchange, and dotted with restaurants and shops set within grand Georgian buildings. The vestiges of old City status and power are obvious.

The street is also the address for Nationwide Building Society’s new London office, purchased in early August.

The headquarters will remain in Northampton, ensuring the building society culture will remain intact, but the treasury team will move to the capital, reflecting the institution’s increasing participation in the capital markets.

"Moving to London gives us access to the right resource pool to maintain and improve our wholesale funding activities, and part of that is better access to the tripartite (Treasury, Bank of England and FSA) and the investor community," says Ashley Lillie, head of treasury markets at Nationwide.

Like most building societies, Nationwide is mostly retail funded through deposits. In recent years retail funding has made up around 70%-75% of funding requirements, while wholesale funding has made up the remaining 25%-30%.

Within the wholesale segment the priority for the past five years has increasingly shifted towards long-term funding — and this has primarily been achieved through secured funding markets, such as covered bonds and RMBS. Between January 2011 and March 2012 it raised £8.2bn of funding through senior debt, RMBS and covered bonds.

Nationwide issued large deals from its prime RMBS master trust, Silverstone, in October 2011 and March 2012. It was the first time the building society has issued two deals in one financial year, though it has no intention at the moment of becoming a twice-yearly RMBS issuer, according to Lillie.

Both deals focused on the 144A dollar market, with US roadshows before each trade was launched. US investors have displayed a growing interest in UK RMBS offerings and the opportunity for exposure to Nationwide’s mortgage book at a decent pick-up over US paper proved tempting. Nationwide raised $3.58bn equivalent in October, with 90% sold in dollars, and $2bn in March on the back of $4.85bn of dollar demand.

"The RMBS market gives us good access to volume and is an important part of our funding, but it’s not as granular as the covered bond market," says Lillie.

Covered opportunity

The covered bond market also provides a greater range of maturities, particularly if Nationwide wants funding of longer than five years. In January 2011, Nationwide successfully raised £750m of 15 year funding — a duration which would be unattainable through RMBS.

This year it issued a covered bond at the short end, joining a group of issuers that sold innovative floating rate covered bonds to sterling investors. The three year notes were priced at 165bp over three month Libor in January.

Deals at the opposite ends of the curve also showed the growing depth of the sterling covered bond investor base. "The development of the sterling covered bond market has been important as it was once seen as a weakness for UK issuers," says Lillie. "There’s now a good variety of demand."

Greater interest in covered bonds from UK banks could also be a side effect of the Bank of England’s Funding for Lending Scheme, which started in August. The scheme offers cheap four year funding — starting at 50bp on top of a BofE haircut — during a drawdown period that will last until December 2013.

UK banks will want to continue accessing the capital markets in that period, but they may favour issuing debt with a maturity beyond 2017 — and that is easier to achieve through covered bonds.

The prominence of retail funding means Nationwide has plenty of collateral to spare for secured wholesale funding. "Because we have a high level of deposit funding, encumbrance is not such a binding constraint for us," says Lillie.

This means the long-term collateral efficiency of RMBS relative to covered bonds, which needs more over-collateralisation, is not such a strong consideration for Nationwide when deciding which market to tap.

The lack of encumbrance also means senior unsecured investors can rest slightly easier, and this confidence was shown in March when Nationwide raised €1bn of five year funding in the senior market at a re-offer spread of 158bp over mid-swaps. Bankers away from the deal said it was a "great result" and praised Nationwide for its intelligent timing after nearly two years out of the market.
  • 26 Sep 2012

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