Brexit bites sterling’s pound of bond flesh

After back to back record years for non-UK sterling SSA supply, the 2019 outlook is obscured by thick Brexit fog. Nevertheless, public sector borrowers have a host of non-core currency options to tap as currency diversification becomes increasingly important.

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Sterling bond issuance by non-UK public sector borrowers was just under £30bn in 2018 by November 27, comfortably outstripping the record £24.7bn that was issued in 2017, according to Dealogic.

Sterling volumes have been boosted by a favourable move in the cable basis swap, which is particularly attractive to US-based issuers. It has also been buoyed by UK bank treasury demand, helped by ring-fencing rules, which meant they were buying for both ring-fenced and non ring-fenced entities.

The demand for sterling SSA paper helped several public sector issuers print their largest deals in the currency in 2018, including the Asian Development Bank’s £600m October 2023, the European Bank for Reconstruction & Development’s £450m July 2023 and the International Finance Corporation’s £500m March 2025.

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But the attraction of sterling could be turned upside down as the UK leaves the EU in March 2019. “Outside of dollars and euros, sterling has presented fertile grounds for issuance this year during the intermittent calm periods through the Brexit storm,” says Sameer Rehman, head of local currency at TD Securities in London. “The concentration of domestic buyers does provide a degree of insulation to the negative headlines. However, maintaining this year’s momentum will require an orderly transition post March-2019.”

Others agree. “The sterling SSA market in 2019 will be dependent on the outcome of Brexit,” says Jean-David Cirotteau, SSA strategist at Société Générale in Paris. “There’s still uncertainty but the sooner we have clarification, the better.”

Concerns over the Brexit negotiations between the UK and EU were starting to feed into the sterling market towards the end of the year, with floaters outperforming fixed rate trades.

“Our syndicate told us that there was a better opportunity in floating rate, as fixed rate was possibly more affected by Brexit volatility and market conditions,” says Rimal Gaind, senior portfolio manager at EDC in Ottawa, which issued a £500m FRN in November.

The floating rate sterling market will become more accustomed to the Sonia reference rate, the most popular alternative reference rate in sterling to Libor, which “will keep opening up possibilities for SSAs”, says Cirotteau.

ADB, European Investment Bank and the World Bank all received strong investor demand for their Sonia-linked floating rate notes in 2018.

EDC plans to follow with a Sonia-linked deal in 2019. Other public sector borrowers looking closely at the Sonia market include IFC and the Inter-American Development Bank.

Niche options

With or without sterling, SSAs will have to heavily diversify away from euros and dollars in 2019.

An unfavourable euro/dollar cross-currency basis swap has led euro funders to shy away from dollars, while Italian political turmoil and the European Central Bank’s gradual wind down and expected end of its public sector purchase programme have made investors more cautious in euros.

“The euro market has been moving wider as the ECB winds down its PSPP,” says Rehman. “Accordingly, it’s natural for issuers to look elsewhere for funding opportunities.”

Rehman says there are “opportunistic transactions” available for borrowers in Canadian and Australian dollars, which are particularly attractive for investors looking to diversify into higher yielding rates products.

The month of July 2018 was the busiest ever month for non-Canadian SSA supply following trades by the European Investment Bank and World Bank in the currency during that month.

The year of 2018 was also a good one for Australian dollars in SSAs. “The basis swap in Australian dollars is attractive and the currency offers a nice funding option for us beyond the 10 year maturity,” says Bart van Dooren, head of funding and investor relations at BNG. “We will be looking closely at the Kangaroo market for the rest of the year and in 2019. After dollars, euros and sterling, Australian dollars is our preferred currency for diversification.”

Other niche currency options for SSAs include the Swedish krona and Norwegian krone markets.

“Scandinavian issuers such as the Nordic Investment Bank have been very active this year in the Swedish krona and Norwegian krone markets,” says Cirotteau. “These are smaller markets, but other SSA issuers could be enticed to them, particularly if they increase their issuance of green bonds as these markets have a lot of green bond investors.”