40 International Financing Review September 8 2018The book was smaller than the €1bn of
orders the issuer gathered in January for a
€500m deal, also with a 10-year tenor. That
was quoted at 10bp over swaps, 5bp wider
than reoffer.
“I had their January 2028s at 8bp over, so
you could argue that fair value is around
9bp,” said a banker away from the deal.
“So it’s coming quite generous. The fact
it’s a CPT is part of the reason, but also it’s
coming on a busy day and if you want to get
momentum, you have to stand out.”PILING INNIBC was competing with covereds also in
the market from AAREAL BANK, COMMERZBANK
and Spain’s DEUTSCHE BANK SAE.Volumes last week reached €4.5bn,
exceeding the previous week’s €4bn.
“It’s definitely a bit of a slower day today
but as far as I am concerned, I am really
comfortable,” the first lead said during the
execution process.
“We’re in the green zone in terms of
oversubscription. It still feels that the
Street is rather long. Also, while levels are
quite stable, it’s not like the outlook is
fantastic in terms of where spreads will go.
Some investors are keeping to the sidelines
and preferring to wait to see what will
happen.”
Demand was unsurprisingly slow for the
tightly priced €250m tap of Commerzbank’s
April 2028s via Commerzbank, HSBC, Natixis,
Nord/LB and SEB.It landed at 5bp through swaps, a basis
point inside the initial guidance level
“The pricing is always going to be a bit
skinny when you do a tap but we’ve
managed to get over the line with over
€290m of demand,” another banker said.
That book total included €60m of interest
from the joint leads themselves.
“It’s coming tight. It’s the same for
Aareal, it’s a €500m no-grow and we’ve got
over €500m without taking into account
the JLMs. At less 9bp, we’re clearly going
for price, we’re not going for a €1bn
blowout.”
Aareal priced its €500m of July 2023s via
DekaBank, Deutsche Bank, Goldman Sachs, HSBC
and UniCredit at 9bp through swaps, the
tight end of less 8bp area guidance.Lloyds, RBC broaden Sonia appeal as
market gains momentum
n COVERED BONDS/FINANCIALS Sun rises on new market for Sonia
Another step in the development of the Sonia-
linked market was taken last week after LLOYDS
BANK PLC and ROYAL BANK OF CANADA brought the
first notes linked to the sterling overnight index
average (Sonia) from financial issuers.
How to tackle the transition from Libor to new
reference benchmarks has been at the forefront
of regulators’ minds since the demise of the
previous reference rate, but so far issuance has
been sporadic.
However, the £750m Sonia-linked three-
year floating-rate covered bond for Lloyds and
the one-year senior for RBC signalled a pivotal
moment for the fledgling market.
Lloyds, which appeals to a global investor
base and is one of the biggest sterling covered
bond issuers, was deemed an ideal candidate to
pick up the baton of Sonia-linked issuance.
“Once you start with SSA it’s a natural
progression to go into the covered bond format,”
said a lead.
In June, the European Investment Bank
printed a £1bn floating-rate note, the first linked
to Sonia. Regulators have decided that Sonia
will replace Libor - which will not be calculated
after 2021 - as the risk-free reference rate in
bond, loan and derivatives sterling markets.
Lloyds opted for a staple three-year tenor
for the new bond as it looked to capture the
greatest possible audience for the inaugural
product. Lloyds Bank Corporate Markets, HSBC,
RBC and TD Securities were lead managers.
“It’s a three-year, so it’s a bit irrelevant from
the perspective of actually solving the Libor
issue, but I think what they’re trying to do is
the safe trade in the safe part of the curve tomake sure they get a benchmark out there and
build on the back of it,” said a banker away, who
thought the deal had gone well.
The lender announced the mandate on
Monday but took time to allow investors to
familiarise themselves with the product, before
marketing on Wednesday morning at Sonia plus
45bp area.
“Clearly, it’s not an established market and
it looks like they started it by applying the basis
between Sonia and Libor and going along
those lines,” said a second banker away, who
welcomed the transaction. “It should work very
well, the universe of investors looking at the new
benchmarks is expanding.”
The first banker away put fair value at 40bp
over Sonia, meaning a NIP at initial marketing
of 5bp.
“They clearly had the feedback to go that
aggressive – I thought they’d go high 40s or
even 50bp, but they must have had IoIs,” he
said.
Orders accumulated to around £1.4bn,
excluding lead interest, and pricing was
tightened for launch at plus 43bp.
Accounts from the UK and Ireland took 95%
of the notes, while European investors took 5%.
Banks were allocated 70%, asset managers
and pension funds 25%, and central banks and
official institutions 5%.
“We are proud to be first bank to trade a
Sonia-linked bond,” said Peter Green, head of
public senior funding and covered bonds at
Lloyds Banking Group. “This is a prudent way
to fund the group and to meet the Bank of
England’s new regulatory objectives.”SPEEDING UP
The Lloyds’ trade was quickly followed by a
£350m sole-led September 2019 senior note from
Canadian lender RBC, suggesting that, after a
slow start following EIB’s £1bn transaction priced in
June, the market could be gathering pace.
“This suggests that the market is moving
pretty fast,” a lead said. “EIB was announced on
Monday and priced on Friday and you can argue
paid a new product concession of around 5bp.
Lloyds was a three day process and probably
paid around 2bp of concession. This was done
intraday and there was not really a concession.”
It priced at 25bp over the compounded daily
Sonia, with a five-day lookback language that
was identical to that used on the EIB and Lloyds
Bank trades, further establishing the market
precedent for other issuers and investors. The
25bp spread equated to 13bp over Libor.
RBC had initially targeted a £200m-300m
size, but was able to increase the deal to £350m
on the back of the £580m order book.
“There’s quite a lot of appetite from UK
market funds for highly rated bank paper in one-
year maturities, a little bit like the 2a-7 funds in
the US,” the banker said.
“What’s interesting is that EIB and Lloyds
were ballpark 70% sold to bank treasuries, which
are a natural first movers for being able to buy
the instrument, whereas the RBC was 100% sold
to UK asset managers.
“The general sense we get is that more and
more investors in the UK are getting more
comfortable with this product and the asset
class.”
Robert Hogg, Helene Durand6 Bonds 2250 p25-55.indd 40 07/09/2018 19:30:00