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Sterling resurrects before BoE pulls support
April 7, 2017 / 1:17 PM / 8 months ago

Sterling resurrects before BoE pulls support

* Borrowers rush to capitalise on BoE support

* BoE expected to withdraw by month-end

* Investors fear liquidity and supply woes

By Laura Benitez

LONDON, April 7 (IFR) - The corporate sterling bond market was jolted back to life by a string of successful deals this week as companies rushed to secure ultra-low funding before the Bank of England potentially pulls the plug on its corporate purchase programme.

Volkswagen was the most high profile borrower in the rush, which followed a successful euro transaction that marked its return to the global capital markets last month.

Sterling issuance totalled £1.4bn, including deals from Deutsche Telekom and Southampton Uni, versus £800m of corporate sterling paper printed in the previous two weeks.

“The BoE’s programme was instrumental in encouraging sterling issuance, and we’ve seen a good pick up on the back of this, which was a key factor in helping market liquidity,” said Nicolas Trindade, senior credit portfolio manager at AXA Investment Managers.

“It’s been a strong start of the year with spreads 10bp tighter so (the) Bank’s support has been a key backstop.”

However, that support could be removed at month-end given the central bank’s target for the Corporate Bond Purchase Scheme was £10bn and it has purchased £9.1bn since September 2016 when the scheme started. The anticipated end-date was March 2018.


Although the first quarter of 2017 has been relatively stable for corporate sterling spreads, the end of the BoE’s programme could spark some greater volatility, Jonathan Platt, head of fixed income at Royal London Asset Management said.

“Whether the programme has delivered on its aims of purchasing bonds that benefit the real UK economy remains open for debate, although we were pleased that the Bank of England amended its original ‘buy list’ to include more domestically focused issuers,” Platt said.

“Looking ahead, we expect to see some manner of sell-off in high profile bonds where prices have been boosted by the quantitative easing programme.”

The iBoxx sterling benchmark index has tightened 23bp since the BoE announced it would start buying bonds on August 4 2016 from 196bp pre-announcement to 173bp on Friday, on an asset swap basis, according to Thomson Reuters data.

Companies sold sterling bonds at a furious pace directly after the programme was announced, printing over £9bn of issuance between August and September.

But issuance slowed down dramatically in recent months, with just £6.65bn of bonds raised by corporates so far this year, including the £1.4bn priced this week.

“We do expect primary issuance to decline and liquidity to deteriorate as the bank steps out and for credit spreads to leak wider, as well as banks begin reducing their inventory,” Trindade said.

“But we think this will be more of a short-term reaction until the market finds its footing again as the outcome for Brexit becomes clearer.”


The host of corporate and financial borrowers that hurried to print paper found strong support in the market.

Volkswagen amassed over £2.3bn of orders for a £850m dual-tranche bond on Wednesday - a comeback trade for what was one of Europe’s most frequent corporate bond issuers until it admitted cheating in US emissions tests in September 2015.

The troubled automaker priced a £500m four-year at Gilts plus 122bp on orders of over £1.3bn, and a £350m eight-year at Gilts plus 147bp on orders of £1bn.

“It was a matter of time before they returned to the sterling market and it was important that they did the euro first,” a lead on the deal said.

“But with that out of the way and it going so well, there was nothing to stop them.”

At the end of last month, the troubled automaker issued its first euro unsecured bond since the cheating scandal, attracting €25bn of demand for the €8bn multi-tranche transaction.

VW issued its sterling bond out of its Financial Services arm, rated A2/BBB+ by Moody’s and S&P, which does not qualify for the Bank of England’s Corporate Bond Purchase Scheme.

Southampton University priced a £300m 40-year deal on the Tuesday week, the same day as Deutsche Telekom, which priced a £250m 12-year transaction, leaving little premium for investors.

The financials sector saw a string of successful deals including a £400m long four-year from Metropolitan Life Global Funding I on Monday and a £175m tap from ABN Amro.

The trades followed Bupa’s £300m seven-year benchmark and Santander UK’s £500m 6.75% PNC7 AT1, both of which were heavily oversubscribed.

“We are taking a neutral position on sterling credit right now, we’re as close to the benchmark as possible,” AXA’s Trindade said.

“The sterling market is not dead by any means, there is still an important place for it and it will remain valuable for issuers needing to diversify.” (Reporting By Laura Benitez, editing by Helene Durand and Alex Chambers)

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