Senior unsecured issuance has been hit hardest by financial uncertainty, with the senior unsecured market being effectively closed to many issuers. Investors are wary of senior unsecured debt, favouring safer investment options such as covered bonds, and issuers are balking at the seemingly ever-widening spreads on senior unsecured debt.
However, experts have suggested that the widening spreads might be enough to entice even sceptical investors – assuming that issuers can afford to fund at such a high cost.
“Current spreads can make for interesting relative value for investors, who may be enticed to participate in new financings with a more stable backdrop,” Keval Shah, head of Citi’s FIG syndicate in London, said in a panel at Citi’s European Credit Conference. “While expected supply in 2012 will not close the funding gap implied by upcoming maturities, I suspect issuance volumes will not be as dire as some reports suggest.”
So if a resurgent senior unsecured market can’t close the funding gap, what can?
Issuers have turned their focus on covered bonds as an alternative method of funding, rivalling or even surpassing traditionally dominant senior unsecured debt.
However, covered bonds are not a foolproof solution, say experts, as issuance entails asset encumbrance, limiting the scale of their implementation, and structural subordination, which can, rightly or wrongly, unnerve unsecured creditors.
In addition, there are concerns about potential volatility, if banks begin to get highly competitive in their search for further deposits. The markets have seen the development of a deposit war in Spain and there are signs that the Italian banks could go the same way.
Government guarantee of senior unsecured debt for large financial institutions is one way in which confidence in the senior unsecured market can be boosted. However, although this might allow senior unsecured debt to close the funding gap in the short term, it seems to be little more than a sticking plaster to keep banks afloat until the crisis can be properly dealt with.
“There have been widespread rumours of the reappearance of government guarantees. These keep us from the cliff, but they aren’t sustainable in the long term,” says one panellist.
The current funding crisis is often compared in severity to the post-Lehman era, but the view that the current crisis is more severe than even 2008-09 seems to be increasingly prevalent.
"In many ways the situation is worse now than in 2008 and 2009.” says Sue Wallace, head of European financials credit trading at Citi. “Back then bonds were trading at much lower prices, plus the market was confident that governments would bail banks out. Now bonds are trading at much higher prices and we don’t have the security of a bailout since governments are not in a position to bail banks out. No one is willing to take risk, whether tier 1, tier 2 or senior. It doesn’t matter, it’s just too volatile and uncertain for people to make informed investment decisions.”
All in all, the attitude towards the funding situation at the Citi conference was rather bleak. Prospects were perhaps best summed up by a blunt statement from one panellist: “I’m not particularly looking forward to 2012.”