4 Min Read
* 2 BoE-eligible corporates hit sterling market
* Northumbrian Water could price inside curve
* BoE to publish purchases from next week
By Tom Porter
LONDON, Sept 29 (IFR) - Two companies with bonds eligible for the Bank of England's purchase programme hit the market on Thursday, giving sterling investors another chance to bet on monetary policy-fuelled secondary performance.
The central bank has been purchasing investment-grade corporate bonds in the secondary market since Tuesday, as it looks to buy up to £10bn over the next 18 months via reverse auctions held every Tuesday, Wednesday and Friday.
Northumbrian Water and Deutsche Telekom, whose outstanding sterling bonds are on the eligible list published on September 12, both launched new trades in the currency on Thursday.
The pair of BoE-eligible trades come shortly after BASF priced the first such deal on Wednesday, a £250m seven-year sold at Gilts plus 67bp.
Northumbrian Water looks set to price the new deal inside where its existing bonds are trading, with DT offering virtually no premium, suggesting buyers are banking on the BoE sending spreads even tighter.
But unlike the European Central Bank, which has been shopping in the primary market for corporate bonds, the BoE will only be buying in secondary.
That is an additional comfort for investors, according to one corporate syndicate official in London.
"If you're an investor you're happier with the BoE approach, because overall more of the benefit should accrue to you rather than the issuer," he said.
"The ECB gets involved in primary, so you have less say on the price and theoretically the issuer gets some of your secondary performance priced in."
Northumbrian Water launched a £300m 10-year trade through Barclays, Lloyds, RBC and Royal Bank of Scotland, with initial price thoughts at 105bp area over Gilts.
By midday the leads had over £950m in the book, and had hauled in guidance to 95bp area plus or minus 3bp.
The issuer's 2023 bonds were bid at 96bp pre-announcement, while its 2033s were bid at 93bp, according to a lead manager, who said that put fair value no lower than 93bp.
Given the three times subscription, bankers away from the deal expected pricing at the tight end of the range, which would give a negative new issue premium on that basis.
Deutsche Telekom opened books on a seven-year deal at Gilts plus low 90bp area through Lloyds, RBC, and RBS. Books were around £375m by midday in London, with no change in the price guidance.
Bankers away from the trade saw it as another tightly priced deal with virtually no new issue premium. One quoted DT's 2022s trading at 79bp and its 2028s at 104bp before the new deal was announced.
The BoE sparked a sharp rally in sterling corporate bond spreads with the announcement of its purchase programme on August 4. Nearly £9bn of investment-grade sterling issuance has been raised by corporates since that date, versus £4.7bn for the rest of 2016.
The market will have to wait until October 6 for the BoE to reveal how successful it has been in picking up assets in secondary. It will publish a running total of its purchases every Thursday from next week. (Reporting by Tom Porter)