Clydesdale goes for covered bonds while Barclays pays for guarantee

The timing of NAB's second RMBS issue for the year coincided with the sale of £1.85 billion of covered bonds by its UK subsidiary, Clydesdale Bank. The bonds are rated triple A by all three rating agencies, yield 50 basis points over Libor and have a 4.25 year term to maturity.

Clydesdale Bank is eligible to seek assistance under the rescue packaged compiled by the UK government for all British banks but has chosen not to do so. It did, however, establish its first covered bond program under which it can issue up to €9.0 billion of bonds. This first issue is supported by a £2.4 billion pool of mortgages originated in England, Scotland and Wales.

Staying with the European theme, we note that Barclays became the first bank to issue bonds under a sovereign guarantee. On Wednesday, Barclays issued €3.0 billion of three-year bonds with a UK Government guarantee. The triple A rated bonds were priced to yield 25 bps over mid-swaps.

Barclays has not issued any three-year bonds in any reasonable volume in recent times, making comparisons of the relative cost of debt difficult. However, the British Debt Management Office has put the cost of a UK Government guarantee for such borrowing at an annual charge of 50 bps plus the median of the borrower's five-year CDS spread for the year to 7 October 2008, plus an additional margin to cover the cost of any payments that may need to be made under the guarantee, in a currency other than pounds sterling.

So in this case, the cost of the debt to Barclays would be mid-swaps plus 25 bps plus 50 bps plus 81 bps (the median CDS spread) plus an unquantifiable margin for issuing in euros - or more than 156 bps over mid-swaps for three-year funding. This doesn't seem particularly cheap and, as the ANZ's CEO, Michael Smith, said on Thursday, government-backed debt may be more expensive than going directly to the market.
But then again, Barclays is rated 'AA' by Standard & Poor's but is on CreditWatch Negative and it did raise the not inconsiderable amount of €3.0 billion.