Virgin Money UK brought its first euro senior transaction in almost two years on Tuesday, a €500m 5.75NC4.75 holdco deal that further encapsulated investors' willingness to buy into smaller names as they search for yield.
While UK national champions have been active across the single currency, US dollars and sterling, Virgin Money's transaction offered the first test of investor appetite for lesser followed credits.
"The UK is a little bit special, in the sense that interest in UK institutions from European investors has lagged the [interest in institutions from other] European countries," said a DCM banker. "There have been questions around the government, real estate, interest rates, cost of living, so there has certainly been a lag in interest from credits out of the UK. If, on top of that, you add a challenger bank such as Virgin Money versus one of the big players, that makes it even harder, if you will. So, the fact it is working as well as it is underlines the incredible strength of the market."
The issuer last sold senior debt in May 2021, a €500m 3NC2 that will be callable in May.
"They've said that their MREL needs this year would be largely centred around refinancing and they have a call coming up in euros. They're keen to maintain a presence in the euro market and to diversify away from sterling," a lead said, adding that the transaction had received a good level of engagement from not just UK accounts but also the European investor base.
"The name has performed quite well over the course of the last two weeks, in line with the rest of the market, where we've seen a compression in spreads," he said. "This is a good time to be in the market."
The iBoxx euro banks senior bail-in index has tightened almost 38bp since mid-January, closing at 106bp on Monday. That is 76.5bp tighter than the 182.5bp wide for 2022 it hit at the end of October last year.
The lead agreed that some accounts still had question marks over the UK and preferred to stick to the more frequent borrowers and larger national champions.
"But they've tightened quite a lot, so this is a nice way of getting UK exposure at a bit of a pick-up," he said.
Leads BNP Paribas, Deutsche Bank, Goldman Sachs and NatWest Markets opened books at IPTs of mid-swaps plus 200bp area, though this was moved sharply tighter to a 175bp landing on books of €1.5bn that included €100m of JLM interest for the Baa1/BBB–/BBB+ rated deal.
Virgin Money's rarity meant that investors' feedback on fair value ranged anywhere between 150bp and 175bp over following the pre-marketing ahead of the deal. The DCM banker saw it at 160bp. The lead looked at the differential between Virgin and its larger UK peers in the sterling market and applied this to euros.
Sharing the load
Virgin was joined by another smaller UK lender, with TSB Bank bringing a £1bn four-year covered bond, its first since June 2021, via Banco Sabadell, Lloyds, NatWest Markets, Nomura and RBC.
“It’s interesting to see the coexistence of Virgin Money, Santander UK – which is out with the Holmes RMBS – and TSB in sterling covereds," said a senior syndicate banker. "Virgin Money issuing in euros again does demonstrate that UK names post the Bank of England facility will have more to do across the markets, but it is good that they have multiple products to share the load.”
It was that rationale driving TSB's trade, according to a lead on that bond.
“We’re getting into a period of time where a lot of issuers across the UK are going to start thinking about refinancing the TFS funding scheme," he said. "This transaction plays a part in TSB’s 2023 plans to refinance some of the exposure they have under that programme.”
Virgin Money said in its Q1 trading update that it expected to issue towards the lower end of the £1.5bn–£2.5bn of secured issuance communicated at FY22, subject to ongoing deposit flows. Its overall deposits grew 1.2% to £66.2bn in Q1.
In the case of Santander, the issuer has set out a condensed timetable for the marketing of its latest master trust offering, Holmes Master Issuer 2023-1, which it is aiming to price on Wednesday after fielding investor questions on Monday and Tuesday. The spread on its £500m Holmes Master Issuer 2023-1 has been set at 58bp over Sonia for a 4.83-year weighted average life.
TSB's deal priced at 60bp over Sonia on books over £1.8bn, with the lead saying expectations had been beaten on both counts.
“This is what you define as the cheapest to deliver funding product," he said. "They started by playing it a little bit conservative but we always had the view that the outcome would land in the [range] where we did."
He added that marketing on Holmes had started in the low 60s. "So if you think about that: it’s a year longer, it’s RMBS, and we landed at 60bp. I think that’s probably helped some of those looking at relative value but from TSB's perspective they were very focused on delivering the size outcome they wanted to achieve.”