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Peripherals fired up for trek back to core
* Unlimited ECB bond buying to encourage second tier banks
* Banks and corp seek to close 400bp core/peripheral gap
* Second Tier issuers to follow national champions
By Aimee Donnellan and Josie Cox
LONDON, Sept 7 (IFR) - The European Central Bank's new bond buying programme has fuelled the hopes of peripheral banks and corporates that the sky-high cost of funding that has haunted them for the past six months will finally revert to more sustainable levels.
The ECB's unlimited sovereign bond buying programme, announced on Thursday, could not have come at a better time, considering the severity of the divide that has emerged between core and peripheral funding costs in both the financial and corporate sectors.
Credit indices screamed tighter in the 24 hours following the ECB statement, with the Crossover iTraxx Index falling below 500bp for the first time since July 2011.
In the sovereign space, meanwhile, 10-year Spanish yields rallied to 5.7%, the tightest levels since the middle of April, on conviction that peripheral eurozone sovereigns now have the full backing of the central bank.
Senior debt capital market bankers are optimistic that there will be a longer-lasting positive impact on peripheral FIG and corporate spreads than previously seen in the aftermath of the ECB's two three-year LTROs.
"There will be a trickle-down effect from the ECB policy plans, which will be more pronounced in peripheral than core markets," said Paul Young, head of DCM syndicate at Citigroup.
The impact is already clearly visible in the primary market. Santander priced a 3.5-year bond on Friday at 390bp over mid-swaps, in line with where it sold a two-year EUR2bn deal last month.
Second-tier peripheral issuers may also be able to access the market in the coming weeks should the market rally continue and investors place faith in the ECB's plans.
"As sovereign spreads improve we should see an easing in funding pressure, a better macro outlook for the country in question and hopefully some of the second-tier names will gain better access to the public market," said Young.
For peripheral corporates, bonds are the only option, according to credit strategists at Bank of America Merrill Lynch, who say loan rates remain prohibitive.
Investor risk aversion to peripheral credits had become so fierce, especially for financials, that the spread gap versus core European issuers had widened to as much as 400bp in recent weeks - sending funding costs for heavyweights such as Santander and UniCredit to untenable rates, market experts said.
Just this week, prior to the ECB announcement, Italian banking giant UniCredit priced a three-year deal at mid-swaps plus 390bp, 45bp wide of where it sold a five-year offering earlier this year, while Germany's Muenchener Hypothekenbank sold the tightest ever covered bond at mid-swaps minus 14bp.
Corporates have also suffered from this dislocation. Spanish telecoms giant Telefonica priced a EUR750m five-year deal at 485bp over mid-swaps last week, more than 400bp more than France Telecom paid on a EUR500m long 10-year.
However, after the ECB's announcement the Telefonica deal was 100bp tighter than its print level - another glaring example of the market's growing confidence.
Some bankers said it was still too early to be sure if the rally had legs, however, but admitted they were more optimistic than during previous rallies that quickly ran out of steam.
"The ECB hasn't pulled out a bazooka, but it has brought out a pretty big shotgun," said an investment-grade corporate banker. "Yes, the Telefonica deal has tightened but they printed the deal ahead of what was a big credit event, when the funding was there at a price it was willing to pay.
"If the company had waited, that effectively would have been gambling, and that is not what this market is about," he added, pointing out significant event-risks ahead, including the German constitutional court's vote on the ESM next Wednesday.
NO PAIN, NO GAIN
Bankers are nonetheless hopeful that issuers that dared to swallow soaring premiums to prove they can raise funds will start to benefit. With EUR4bn of demand pouring into its latest senior deal, Santander certainly seems to have been rewarded by investors for its efforts to keep relationships open.
"Peripheral borrowers in the FIG and corporate space now have access and that's the key point about this rally," said Andy Young, head of FIG syndicate at Credit Suisse. "There is a good balance in the market where investors and issuers are coming to an understanding about fair value." (Reporting by Aimee Donnellan and Josie Cox, additional reporting by Natalie Harrison.; Editing by Natalie Harrison & Matthew Davies)
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