UK

The non-eurozone, no-euro theme in the covered bond market continued on Thursday with the announcement of two debut currency benchmarks, one of which was priced. After the successes of Barclays and Nationwide, National Australia Bank issued its first sterling dea, Lloyds mandated for another sterling deal and UBS is set to bring its first dollar deal.

Nationwide printed £650m of three year floating rate notes to demand on Monday, the second UK covered floater in that maturity in as many working days. Barclays and Nationwide’s covered FRNs highlight the growing demand for UK covered bonds and the broadening range of investors wanting a piece of the market.

Nationwide has kept up the flow of sterling issuance since the start of 2012, following Barclays and RBS with a three year covered bond priced at 165bp over three-month Libor on Monday. As with Barclays’ three year last week, the deal’s floating rate format makes heavy participation from bank treasuries — some of which will be awash with cheap ECB cash — highly likely.

ABN Amro and Credit Suisse maintained primary market momentum on Wednesday, adding another €2.25bn of supply. ABN Amro paid above initial price thoughts to ensure smooth execution of its 10 year, while Credit Suisse was able to price its five year inside UBS’s offering last week — making it the tightest five year euro print of the year.

RBS has issued the second sterling covered bond this year and its debut deal in the currency. It chose to differentiate itself from Barclays’ 10 year deal with a longer 12 year. In so doing, it attracted a strong order book enabling it to price in line with guidance and the deal has since performed well, in contrast to Barclays.

The covered bond primary market continues to enjoy good momentum, with as many as four issuers collectively raising the equivalent of around €5bn in the four to 12 year area across two currencies.

Despite being the most expensive UK covered bond in sterling, Barclays Bank’s inaugural benchmark which priced on Thursday, met with a resoundingly strong reception – boding well for follow on deals from RBS, other UK issuers and possible other European names too.

DNB Nor and Lloyds came to market on Wednesday with five year offerings that enjoyed a healthy oversubscription. German investors and bank treasuries drove the trades for the non-eurozone credits, enabling both to price at the tight end of guidance. But in terms of spread, the difference of nearly 120bp showed that the similarities ended there.

The covered bond primary market has opened strongly with a trio of top tier names from core jurisdictions collectively raising around €4.5bn on comfortably oversubscribed books. A further seven deals have been mandated for issuance in the near future. This impressive showing is to be expected given liquidity is technically strong. Yet big challenges lie ahead, specifically for peripheral markets — where borrowers remain shut out.

Singled out for special treatment by European regulatory initiatives, covered bonds were the funding tool of choice for the region’s banks in 2011. But an escalating Eurozone crisis meant the record-breaking market entered 2012 relying on state support.

Lloyds TSB has mandated Barclays Capital, Natixis, and UniCredit, alongside itself, as leads for a euro denominated covered bond early in the new year. It will be the UK borrower’s first benchmark covered bond since March.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.