Lloyds returns to public bond market with a bang

By Aimee Donnellan

LONDON, Oct (KOSDAQ: 039200.KQ - news) 7 (IFR) - Lloyds Bank will end an almost two-year euro senior unsecured hiatus and demonstrate how far things have come for UK banks when it prices a EUR1bn five-year bond later on Monday.

The issuer, rated A2/A/A, opened books this morning for the benchmark trade, only the second senior unsecured issue from a UK bank in the public euro market this year.

The Bank of England's Funding for Lending Scheme - offering much cheaper debt than public markets - has created a drought of issuance from UK banks. Santander UK is the only other bank to have tapped the market when it sold a EUR750m seven-year back in July.

The lack of issuance is in sharp contrast with pre-crisis numbers. In 2007, for instance, UK banks issued as much as USD152bn-equivalent in the senior format.

This supply shortage, combined with a host of liability management exercises across bank ABS, senior and covered bonds, increased investor demand for UK paper, creating an ideal backdrop for Lloyds to access the market.

"Investors have been clear that they like Lloyds as a credit and would be keen to get exposure through a public market transaction, and this is an opportunity for us to engage with the market in a cost-effective manner," said Peter Green, manager of senior issuance at Lloyds.

With that in mind, the part-nationalised UK lender hired Barclays (LSE: BARC.L - news) , Credit Agricole CIB, Lloyds and UBS (Berlin: UBRA.BE - news) for the deal, and began marketing at 70bp area over mid-swaps, some 100bp through where Spain's CaixaBank is set to price a shorter-dated 3.5-year deal on Monday.

"As was expected, the demand is very strong for Lloyds despite the softer market backdrop," said Vincent Hoarau, head of FI & covered bond syndicate at Credit Agricole.

"Investors are very keen to buy into Lloyds given the long period of absence in primary and I think the results of this deal are likely to catch the attention of other UK banks."

Investor demand was plain to see, with orders at the latest update over EUR2.25bn for what was a maximum EUR1bn issue size. Guidance was first tightened to mid-swaps plus 65bp area and then to a final plus 63bp - a far cry from the 305bp spread it paid in January 2012 for a deal at the same tenor.

That EUR1.5bn deal has performed well in the secondary market and is now bid at mid-swaps plus 50bp, according to Tradeweb.

"Everything pointed to a good outcome for this bond," said Green.

"The market and funding spread backdrop is significantly different than it was 18 months ago reflecting the improvements that we have seen in the Lloyds credit story."

Green expects UK funding requirements to remain modest for the remainder of 2013 and 2014 and added:

"We have consistently signalled that LBG has modest wholesale funding requirements. We have been active in issuing private placements and we try to maintain options around all of the diversified funding markets that we have access to."