LONDON, Sept 5 (IFR) - Investors are piling into sterling
issues from corporate and financial issuers as they get ahead of
the Bank of England's corporate bond purchase scheme due to
start later this month.
Aviva, the United Kingdom's largest insurer, has attracted
over £2.3bn of demand for a £400m 2049 non-call 2029 Tier 2 bond
while British American Tobacco has lured £1.5bn of interest for
a 2052 benchmark.
Investors are already fighting for allocations in the
European market, with the European Central Bank hoovering
hundred of millions of corporates and covered bonds in the
primary market each week.
While the Bank of England has yet to say whether it will
intervene in the primary sterling market, the struggle to get
hold of bonds in secondary is likely to increase as the central
bank gets going with its £10bn programme.
This is combined with a generally undersupplied sterling
market where issuance slowed before the UK's Brexit vote.
Monday's supply is some of the first primary activity all
year in a sterling sub format. Lloyds Banking Group sold the
first deal in that format in August, a legacy £385m TSB Tier 2
bond that was almost twice subscribed.
While the BoE will not buy bank or insurance bonds, such
paper is expected to benefit from trickle-down effects of the
This gave Aviva, already a well-liked name among the
buyside, the upper hand. Leads Barclays, Citigroup, HSBC, Lloyds
and RBC were able to move guidance to 365bp area over Gilts,
some 20bp tighter than the wide end of the 380bp-385bp IPTs.
The IPTs offered a 25bp to 30bp concession, said a banker
off the trade. A lead saw Aviva's £400m 5.125% 2050 non-call
2030s at Gilts plus 353bp, having priced in May last year at
Bank and insurance sterling subs weakened in line with the
market earlier this year, selling off again in the days after
Sterling issuers have opted to issue in other currencies
instead. Prudential for example went to the Reg S dollar market
in May, and will do so again this week.
Bonds however have staged a comeback, with Aviva's £400m
5.125%s now around 170bp inside February's wides at Gilts plus
364bp, according to Eikon.
Sterling investors are willing to stretch beyond the market
stalwarts, and lesser known names have benefited from the more
Paragon, the UK's largest independent buy-to-let lender, is
marketing a £150m callable 10-year Tier 2 bond (rated BB+ by
Fitch) via Bank of America Merrill Lynch and UBS. Guidance is
7.25%-7.375%, the tight end of the 7.5% area IPTs.
The issuer mandated a sterling senior unsecured note last
year, but choppy markets derailed those plans and it issued a
£112.5m retail bond instead. The new issue will refinance an old
Tier 2 deal.
"It feels tricky. 7.5% is a lot of spread," said a banker
off the mandate.
But a lead pointed out it is a small borrower issuing in a
small size, a deal that is not going to interest everyone. The
size was indicated at £125m to £150m, which can deter some
investors who prefer larger, more liquid issues.
"We had the confidence to put it on screens and we got
decent feedback last week," he added.
(Reporting by Alice Gledhill, editing by Helene Durand, Julian