When banks announce the completion of bond issues, you don’t often get treasurers or chief financial officers making public comments on them. But such have been the stresses on the bank funding market, and so relieved have bankers been to see access restored with a flurry of deals from a range of issuers at the start of 2013, that when Intesa Sanpaolo received $11 billion of orders for a $3.5 billion two-tranche offering of three-year and five-year bonds in the US, the bank’s chief executive was moved to applaud it.
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| Enrico Cucchiani, chief executive of Intesa Sanpaolo |
With an order book of six times the initial indicated benchmark size, orders from 430 accounts and final pricing at 230 basis points over mid-swaps offering no concession to similar issues trading on the secondary market in Europe, it was indeed a blowout. But it is as a sign that the funding problems for peripheral European banks might have passed the worst point that Enrico Cucchiani, chief executive of Intesa Sanpaolo, celebrated what would once have been a bread-and-butter transaction barely worthy of note. He says: "This transaction and the relative pricing is a strong vote of confidence by US institutional investors; it reflects the appreciation for the financial strength and the positioning of the bank; it is also a positive sign for the Italian banking system." US investors, long sceptical about Europe, took three-quarters of the deal.
European national champion banks had set the tone at the start of the year, following on from the rally in bank debt in the second half of 2012 with well-received longer-dated deals and even subordinated bonds. "Market conditions are as strong as we have seen for a couple of years," says Mark Geller, head of European financial institutions syndicate at Barclays. "Investors believe that the actions of central banks have taken eurozone tail-risk and other systemic issues off the table for the moment. The theme has been a search for yield and performance through spread compression in the periphery and also in subordinated debt."
One day after the Intesa Sanpaolo deal, Spain’s Caixa Bank attracted €5 billion of demand for a €1 billion three-year deal that allowed the Baa/BBB- rated issuer to price at 285bp over mid-swaps, down from initial guidance of 310bp and just 25bp wide of the Spanish sovereign, which has itself rallied sharply this year.
Fully 80% of the deal went to investors from outside Spain.
Issuance slowed as European banks moved into their quiet periods ahead of 2012 earnings announcements at the end of January and start of February. Bankers hope that activity will pick up strongly again soon after.
Although the widespread assumption just months ago was that the European Central Bank would have to offer another long-term refinancing operation to tide struggling European banks with limited market access past looming maturity schedules, strong core European banks are now paying back their LTRO borrowings.
Even some stronger banks in the periphery are tempted by the idea, regulators tell Euromoney, because they want to show the market that they don’t need LTRO financing. Ability to fund is in itself a positive signal for banks, with liquidity and access to funding also a ratings driver.
Could this be the start of a positive feedback loop, or have investors in bank debt grown complacent?
Hunger for yield amid diminished supply of investable bonds is an obvious driver of investors’ return to bank debt. Geller says: "In 2012 net negative issuance from banks in euros, as deals matured and were not refinanced, was €190 billion and it was also substantial in 2011. So these redemptions on top of inflows into fixed income funds during 2012 left investors with decent amounts of cash that they will seek to put to work."
It is the different maturities at which investors will lend to national champion banks from the stronger core European countries and to banks in the periphery that denote lingering caution and discrimination.
Further progress is expected next month towards finalizing the European recovery and resolution directive for banks, which brings closer the much-talked-about era of potential bail-ins of holders of subordinated and senior unsecured debt. "We see a trend for improving intrinsic strength of banks but a weakening of state support for them, which are two sides of the same regulatory coin," says James Longdon, managing director, financial institutions, at Fitch.
The Bank of England and the US Federal Deposit Insurance Corporation produced in December a joint paper on procedures for resolution of a failing globally active, systemically important financial institution, including allocation of losses to shareholders and unsecured creditors.
One banker says: "Given the likely grandfathering arrangements before bonds are potentially subject to bail-in, it looks like investors buying three-year peripheral bank debt see potential short-term performance without taking the risk of being subject to bail-in. Investors buying 10-year Deutsche Bank bonds seem to be signalling comfort with accepting that risk for that issuer in that jurisdiction. What’s interesting now is deals like the five-year BBVA offering that seem to show investors happy to tip-toe into that part of the maturity bucket that might hold bail-in risk."
