CPPIB Capital discovered on Wednesday that demand for floating-rate SSA paper in the sterling market is far from buoyant, with its ambitious attempt to revive the product only achieving a minimal size after leads posted no book updates.
Those involved in the transaction had explained that a sterling FRN, a format that has not been seen in the SSA market in almost a year, seemed viable because pricing for the product was potentially improving and argued that the fact that covered bond issuers have been having success with the instrument was a sign that demand existed.
However, the Canadian issuer was only able to raise £300m with the April 2027 note, the smallest size for a new sterling FRN seen since late 2019, and leads Bank of America, NatWest Markets and TD gave no indications of book size.
“The sterling market is a bit of basket case and sometimes things work and sometimes they don’t,” said one banker. “There is a lot of room for error. Moves in swap spreads are part of the problem, as is the fact that the secondary market hasn’t re-marked to where investors want to buy and inflation is playing a big role in the market. All of this makes it harder to do new deals.”
The trade priced in line with IPTs, at a spread of 28bp over Sonia and with a coupon of Sonia plus 125bp.
CPPIB tapped the market because it has a need for the currency, explained a second banker, who was involved in Wednesday’s trade. It was in fact CPPIB which last placed a sterling FRN. The issuer sold a £750m June 2026 in June 2021.
The limited traction that the Canadian issuer was able to find on Wednesday is likely a worrying sign for issuers that need to raise sterling financing in the benchmark market, given that fixed-rate trades are also proving difficult.
“The market isn’t functioning normally, and you have seen transactions come out with what seem like frankly enormous new issue premiums and small books,” said the first banker.
Overall sterling benchmark supply has been sparse this year, CPPIB is only the third SSA issuer to issue in the last two months, and there have been long periods without any new deals pricing, thanks to an illiquid secondary market, tightening monetary policy and limited appetite for new supply.