Issuers hit deep sterling pockets as BoE corporate purchases near

By Alice Gledhill

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 (Other OTC: AIVAF - news) , 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 (Kuala Lumpur: 4162.KL - news) 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 (Other OTC: LLOBF - news) sold the first deal in that format in August, a legacy £385m TSB Tier 2 bond that was almost twice subscribed.

While the BoE (Shenzhen: 200725.SZ - news) will not buy bank or insurance bonds, such paper is expected to benefit from trickle-down effects of the programme.

This gave Aviva, already a well-liked name among the buyside, the upper hand. Leads Barclays, Citigroup (NYSE: C - news) , HSBC, Lloyds and RBC (Other OTC: RBCI - news) 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 290bp.

Bank and insurance sterling subs weakened in line with the market earlier this year, selling off again in the days after June's referendum.

Sterling issuers have opted to issue in other currencies instead. Prudential (HKSE: 2378.HK - news) 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.

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Sterling investors are willing to stretch beyond the market stalwarts, and lesser known names have benefited from the more benign backdrop.

Paragon (LSE: 0NFG.L - news) , 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 (LSE: 0QNR.L - news) . 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 Baker)