UK banks charge into bond market ahead of Scottish vote

* Barclays (LSE: BARC.L - news) follows Lloyds, Standard Chartered (HKSE: 2888.HK - news) , Abbey into market

* Scottish-based lenders worst performers of UK bank debt

* Yes vote will not block UK bank market access - investors

By Aimee Donnellan

LONDON, Sept 8 (IFR) - UK banks are taking the global bond markets by storm, raising billions of debt ahead of a crucial independence vote for Scotland, keen to lock in funding ahead of potential volatility.

Barclays Bank was the latest financial institution to plough in the market on Monday with a short-dated covered issue.

It comes hot on the heels of Lloyds Bank and Standard Chartered, which raised over £3.5bn-equivalent in the euro and dollar markets last week, and ahead of HSBC, Nationwide Building Societe and Abbey National.

The Scottish independence debate has been rumbling in the background for months, but with the vote in less than two weeks and a YouGov survey in the Sunday press putting the "yes" camp narrowly ahead, it is a stark reminder things might not go as the market hopes.

"Right now, we don't know what the fallout might be if there is a "yes" vote," a head of syndicate said. "I don't think it would stop issuers from having access but generally, one thing the market does not like is uncertainty and a "yes" vote would certainly bring that on."

A London-based fund manager agreed. "If they [the Scots] vote "yes" it will definitely have an impact on the likes of RBS (LSE: RBS.L - news) and Lloyds that have their registered offices in Scotland as their ratings will be significantly lower," he said.

These banks were the worst performers of the UK lenders in the bond market on Monday morning with RBS's curve widening by 5bp and Lloyds' by 4bp, while Barclays' only moved 1bp wider.

They also suffered in the stock market with Lloyds and RBS the biggest losers this morning, down 2.2% and 2.7% respectively

According to analysts at Morgan Stanley (Xetra: 885836 - news) , a swift move of domicile to the UK, post-Scottish independence, by RBS and Lloyds may allay a lot of the fears credit investors may have over the consequences of an independent Scotland for the banks.

VOLATILITY AHEAD

UK banks have been caught off-guard by the momentum of the "yes" vote, and that could cause volatility in the bond market, temporarily raising funding costs for all UK lenders.

"Investors are confident in the strength of UK banks but when they are buying long-term debt, they will be thinking about what might happen to it in the future," the fund manager said.

Debt capital market experts are quick to point out that a "yes" vote will not block UK banks from accessing the bond market, but a disruption to the way the UK economy functions may cause volatility.

"I don't think UK banks are particularly prepared for a "yes" vote so there is some activity in the market now," said a debt capital markets banker.

"Barclays is going for low risk, low cost because while there is a fear that a "yes" vote may cause problems, quantitative easing in Europe will reduce funding costs further."

Investors so far appear to have been undeterred by the fears. Barclays' transaction had attracted around £1.8bn of demand at the last update.

Lloyds had no problems either last week, attracting around 1.7bn of orders for a 1bn five-year trade and just shy of US$3bn for a US$1bn deal at the same maturity.

And while credit default swaps have widened today, UK banks' funding costs have improved remarkably in the past two years.

The yield on a 2017 senior bond for Lloyds has fallen in from 4.5% at the beginning of 2012 to just 0.5% today. (Reporting by Aimee Donnellan, Editing by Helene Durand, Sudip Roy and Julian Baker)