GBP Swaps: Truss era gives birth to buy-in mega era

Issuance weighs on ASWs in bearish trading

After a patchy week of corporate/SSA bond issuance across core markets last week, it roared back today, with the GBP market seeing an unusually high number of four such issues as borrowers and lead managers took advantage of higher yields and decent basis swap conditions to sell, sell, sell.

The issuance included three deals (Ford, Ned Waters and KfW) with either 2025 or 2026 maturities and totalling £1.15bn, which seems to have accounted for sharp moves lower of as much as 3bps in ASWs in those maturities.

Weak gilts and also weighed on ASWs as the market continued to reprice the rate hike risks, pushing 2y gilt yields another 5bps higher in soggy conditions that persisted even after USTs rallied 8bps or so on data this afternoon that was mixed but at least not as relentlessly strong as much of last week’s US data.   

Despite bearish conditions in gilts, the fact that today’s £650m was again fully covered (albeit by a modest 1.9 times) was sufficient to allow gilt yields to meander their way into the close this afternoon, having repriced higher in the morning.

At the 4:15pm close today the long end of the SONIA futures curve was as much as 13 ticks down on the day, while 2y gilt yields were +5bps at 3.66%, 5y was +5bps at 3.69%, 10y was +5bps at 3.81% and 30y was +6bps at 4.14%. Swap spreads were mixed with the wings taking a bit of a battering as the 2y fell 2.3bps to 46.8bps, 5y was down 2.6bps at 39.1bps, 10y was +0.1bps at -11.5bps and the 30y was -2bps at 57.5bps. And in inflation, RPI swaps were +6bps in the 111y, to 4.03%, and the 30y was +4bps as the curve moved a bit higher, broadly in tandem.

Truss era gives birth to buy-in mega era

Canada is a very big country with a penchant for creating very big companies in the world of pensions and insurance. One of those companies is Intact Financial Corp, Canada’s biggest provider of property and casualty insurance and the holder of total assets worth CAD 35bn or so.

This mega-insurer, with tentacles all over the world, has announced the opening of what many have predicted was coming. The era of the mega-de-risking transaction.

Today, along with its UK insurance business RSA (formerly Royal and Sun Alliance) it signed off on a £6.5bn pension buy-in, the largest pension de-risking deal since this sector crept into life in 2007, besting the previous largest deal, a £4.7bn buy-in/buy-out executed on behalf of GEC by Rothesay in 2019. Today’s Intact/RSA deal was put together by PIC, with help from LCP and Slaughter & May.

The highlights of the deal (according to a press release from Slaughter and May) are as follows:

• Largest ever bulk annuity transaction from pension schemes to insurer, covering 40,000 members and c.£6.5 billion of liabilities

   

• Transfers risk from the Schemes to a life insurer specialising in managing long-term risks, with access to the reinsurance markets

   

• Landmark deal which addressed significant issues of timing and complexity, paving the way for other very large transactions

   

• Pricing agreed amidst unprecedented market volatility during the LDI crisis.

   

• Improvement in pension scheme funding levels due to rising gilt yields created a favourable opportunity for the sponsor to accelerate the Schemes’ de-risking, as well as de-risk its own balance sheet, and for the Trustees to enhance member security

   

• Transaction facilitated by upfront contribution from Intact of approximately £500 million using excess capital, debt and preferred shares

   

• Complex structuring considerations included accommodating the Schemes' existing longevity and asset swaps

   

• Following full implementation of the transaction, PIC’s solvency ratio would be in excess of 200% on a pro-forma basis, based on 30 December 2022 market conditions. Further details on PIC’s solvency position will be provided along with PIC’s 2022 year end results in March.

The deal was signed today but, according to sources close to the deal, the hard yakka was done during the turbulent Truss mini-era. One such source, who declined to be identified, said today that “with these deals there is a period of price lock, where the pricing is agreed and pension scheme assets are allowed to be used to pay for the de-risking process.”

This process, the source said, largely took place in October, when 30y gilt yields briefly topped 5% (from below 2.50% in August). “The price lock was set during the Truss interregnum,” he added.

Another source closely involved in the transaction confirmed that the repricing of gilts post the Truss era drove this deal and has also created the conditions in which the long-predicted de-risking boom can finally happen.

“This new era of greater scale is a function of higher gilt yields which has meant that a lot of pension schemes find themselves better funded than they expected to be because their assets declined less than liabilities (higher yields equate to lower liabilities).”

“The last time,” continued the source, “that this happened was when yields rose in 2014-15… the pension funds found themselves better funded, which gave them a window to de-risk, but most of them ummed and ahhhed as the window shut on them. They have learnt from that though and this time they are ready to go.”

Meanwhile, he added, “the PIC, the L&Gs, the Rothesays of this world have got used to doing these transactions and in getting used to them they have become more able to scale up as required, and the fact that interest rates are in a different place to even a year ago means that conditions are right on both sides of the transaction.”

Which hopefully might mean an era of more flow in 20-year and longer gilts, IRS, RPI swaps and linkers to add a bit of fun to those markets just at the time when the closely associated, regular LDI business might ironically be heading for the exit, in some cases at least.    

New issues:  Barclays, Ford, Ned Waters, KfW

• Barclays today priced a £1.5bn, Perpetual NC6y, AT1 bond at 9.25% via sole lead Barclays. The deal drew a £5bn order book from a yield-hungry investor base.

   

• Ford Motor Credit today priced a £500m, 6.86%, Jun 2026 bond issue at gilts +310bps via Barclays, Goldman, HSBC, ICBC, Lloyds and NatWest.

   

• Dutch dam-builders Ned Waterschaps today priced a £250m, 4.5% Jun 2025 bond at gilts +84bps via BMO, HSBC and TorDom.

   

• KfW today priced a £300m tap of its 1.125% July 2025 bond at gilts +60bps via BofA and RBC.