The Rodney Blog 2023: A return to returns
Nationwide Building Society issued the second series of the year from its Silverstone Master Issuer (SMI) Programme in late November, attracting a 3x oversubscribed order book even after increasing the size of the deal from £500m to £750m, and ultimately pricing at a spread of Sonia+67bp.
That is a strong level when compared to 82bp for Virgin Money’s Lanark Master Issuer transaction in late October, and 71bp for Principality Building Society’s standalone print in mid-September, which was priced before the UK’s mini-Budget. We now see Nationwide’s new four-year Silverstone AAA notes bid around 64bp and no bonds are offered by dealers, pointing to increased demand for high quality floating rate paper.
Interestingly, Nationwide simultaneously launched an any-and-all tender offer for three series of relatively short dated existing Silverstone notes, the rationale being “to provide liquidity to the noteholders while optimising its funding and liquidity position”. The purchase prices were materially higher than previously observed market levels, and corresponded to spread levels near half of that seen at the peak of the Truss Tantrum, so this looked an attractive opportunity for any holders who wished to exit. In the subsequent days, we observed a flurry of trading in these tendered series at levels near or even above the tender purchase price, which combined with the results of the tender painted a very strong technical picture for the UK Prime RMBS market. Only £138m current par value of notes were tendered, representing 9.8% of the eligible current par value. This signals to us that investors were buying eligible bonds near or above the tender price with the intention of holding instead of accepting the tender, again underlining the strong demand for short dated UK prime master issuer paper. This also established a new clearing level for similar bonds, thus spurring a rally in the sector.
We have previously noted the strong demand from bank treasuries as rising rates make European ABS senior bonds an attractive high quality liquid asset for banks again. We believe this is still the case and will remain so for the near to medium term. In addition to bank treasurers we can also see AAA Prime RMBS getting a more prominent allocation from other investors, as with rates having risen there is finally some income on offer. Nationwide priced its previous AAA SMI bonds in January at Sonia+29bp at a time when the Sonia rate was at just 0.2%, while the current coupon for the new SMI bonds is rather healthier 3.6% (Sonia+67bp). Pending a likely further 50bp hike by the BoE next week, that income will be pushed above 4% for AAA Prime RMBS, eight times the coupon paid on offer at the start of 2022. With the strong technical expected to persist, we are looking forward to a more active primary market for UK Prime RMBS going into 2023.