HBOS sells bonds, second bank to tap guarantee

LONDON (Reuters) - HBOS became the second bank to take advantage of a government guarantee to tap the bond market, raising 3 billion euros (2.4 billion pounds) on Wednesday and adding a second sterling bond amid strong demand.

The biggest mortgage bank said it paid mid-swaps plus 20 basis points to sell a two-year, 3 billion euro bond after attracting investor interest amounting to 4.5 billion euros.

Investor enquiries then encouraged the bank to launch an additional three-year sterling benchmark bond, which will be priced later on Wednesday, HBOS said.

Guidance for the second bond is set at mid-swaps plus 25 basis points area, an official at one of the banks managing the sale said.

HBOS said it welcomed the guarantee as "a positive measure that would help liquidity in the market."

The guarantee has created a new asset class. Banks pay a fee to the government, which pushes up their borrowing costs, but in exchange they gain the ability to attract a different type of investor, who views the triple-A bonds as a form of sovereign debt.

HBOS has been hit by the financial crisis and by concerns about its exposure to the weak housing market. Lloyds TSB stepped in last month to buy it in a government-brokered deal, which awaits a shareholder vote.

Barclays, BNP Paribas, HSBC and Lloyds TSB were bookrunners for the euro bond sale, and HSBC, Lloyds and RBC Capital Markets for the sterling bond, HBOS said.

Barclays was the first to tap the new market on October 22 by selling a three-year, 3 billion euro guaranteed bond at 25 basis points over mid-swaps.