HSBC UK Bank made its debut in the sterling covered bond market with a thrice-subscribed £500m Sonia-linked transaction on Wednesday, years after the demise of the group's last UK covered bond.
The deal inaugurates a covered bond programme set up last year that sits within HSBC UK Bank, the group's ring-fenced UK entity. Prior to the implementation of UK ring-fencing rules, HSBC had issued regulated UK covered bonds via HSBC Bank Plc, but that programme was wound down after mortgages were moved to the ring-fenced entity, with its last issuance maturing in 2017.
While the execution was supported by the strength of the HSBC name and the deal's capped £500m size, bankers at the leads said there was still work to be done in ensuring investors had lines ready. The issuer adopted an accelerated two-day execution strategy, navigating a significant sell-off in Gilts on Tuesday and getting in and out of the market before Thursday, when new prime minister Liz Truss will present her energy plans.
"These are volatile times to execute into, especially when it's an inaugural name, regardless of its denomination or scale," said a banker at one of the leads.
The five-year deal was marketed with initial guidance of Sonia plus 65bp area, via CIBC, HSBC, ING, Lloyds, Nordea, RBC and Santander. The spread was ultimately set at 62bp, with the final book standing above £1.5bn.
A second banker on the deal said it had achieved its objective of providing a solid platform for future issuance, noting the trade's limited size reflected the issuer's modest funding needs.
Bankers said it was priced without any new issue concession, based on trading levels of Sonia-linked covereds from other major UK lenders.
Reference points included Nationwide's £1.5bn April 2026s, quoted at 58bp, according to Tradeweb, and Santander UK's £1bn February 2027s, quoted at 61bp.
Some of those secondary levels had tightened over the last week, making the Sonia covered market more attractive – although for arbitrage-focused issuers, bankers said euros still offer a sizeable saving versus sterling in most cases.
"Sonia spreads had underperformed a bit over the last month or so, but in the last week the tone has reversed and spreads are 1bp–2bp better than a week ago," said a third banker. "There has been a pick-up in activity on the bid side, with accounts looking to add, a few clips being traded, and that has brought spreads in."
A gentle reminder
In the euro covered bond market, a trio of trades garnered smaller order books than had been seen earlier in the week.
"I would tend to think it is down to the issuers, or in Nordea's case the tenor and the absolute spread, rather than a change in market sentiment," said a fourth banker. "I'm pretty sure if you bring a five to seven-year French or German covered from a high-quality issuer you will see the kind of bids we had seen earlier in the week."
The average book size of the five euro covered bonds priced on Monday and Tuesday was around €1.9bn, but the largest order book on Wednesday was the €1.4bn-plus book garnered by Nordea Mortgage Bank.
Leads Credit Suisse, HSBC, Natixis, Nordea and UniCredit marketed the 10-year euro benchmark offering with initial guidance of mid-swaps plus 14bp area, before ultimately launching a €1bn deal at 11bp.
Estimates of fair value ranged from 6bp to 8bp, implying Nordea paid a concession of 3bp–5bp.
A banker at one of Nordea's leads said they had encountered some price sensitivity, with one large investor dropping out when the price was revised.
"From 14bp to 11bp is not the biggest move we have seen recently, but despite that we saw some sensitivity ... it is a gentle reminder there is still price sensitivity in the euro covered bond space and so you should be careful, especially for names that trade tight," he said.
Aareal underperforms
A €625m seven-year covered bond from Aareal Bank, meanwhile, was only fully subscribed thanks to lead orders.
The deal was launched at 11bp, inside initial guidance of 13bp area, with books closing at around €710m (including €130m JLM interest). Commerzbank, DZ Bank, Helaba, NatWest Markets and UniCredit were the leads.
A €600m five-year covered bond from Australia's Macquarie Bank drew slightly stronger demand, with books closing above €775m (excluding JLMs).
The deal was launched at 30bp, down from initial guidance of mid-swaps plus 32bp area, via BNP Paribas, Credit Agricole, HSBC, ING, Macquarie Bank Limited (London Branch), Macquarie Bank Europe Designated Activity Company and Societe Generale.
"Getting €775m for Macquarie is actually a good result – obviously, it comes with a pick-up to the [Australian] majors, but it is a name that some investors still find challenging, even in covered bonds," said the third banker.
"Aareal is the one that really underperformed, which I suspect is a case of it being a smaller, lesser-followed bank."
Bankers questioned whether there is some fatigue around the name. The new issue is the German lender's fourth euro benchmark Pfandbrief of 2022.
Some market participants suggested sentiment towards Aareal has also been affected by a protracted takeover saga with a buyout group led by US private equity firms Advent International and Centerbridge Partners. The buyout group succeeded in winning sufficient support from Aareal's shareholders in May.