Event risk casts shadow across Spanish banking sector
LONDON, Sept 28 (IFR) - Spanish banks once again look to be shut out of the public debt markets after the post-ECB euphoria supporting spreads came to an abrupt halt this week.
Spanish banks have managed to sell EUR6bn of senior and covered bonds since early September ahead of the imminent publication of stress tests results, the Catalonian secession drama, a potential sovereign ratings cut and the possibility of a formal sovereign bail-out.
But the turnaround in sentiment became self-evident when BBVA, the country's second largest bank, struggled on Monday to sell a EUR1bn two-year senior unsecured bond at mid-swaps plus 325bp.
This was only two weeks after it had sold a EUR1.5bn three-year offering at mid-swaps plus 380bp, which lured more than 230 investors with a final orderbook exceeding EUR2bn. This week's offering by contrast only scraped over the line and finished up with a EUR1.1bn book from just 150 accounts.
The three-year deal has been battered by the volatility in the secondary market since it priced at mid-swaps plus 380bp, tightening by 20bp before blowing out back to reoffer.
BBVA's timing was questioned by many. While there was a sense of relief earlier in the week that independent stress tests had found a smaller-than-expected capital hole of just EUR60bn in the country's troubled banks, it followed a heavy month of issuance.
"There has been a lot of supply out of Spain in recent weeks and I think the consolidation of the secondary market is going to make it harder and harder for Spanish names to print deals," said a banker.
Furthermore, Spanish banks focused the issuance on the short end, as funding costs rise prohibitively beyond the comfort zone provided by the ECB's three-year LTRO. The market has struggled to digest the weight of supply, preventing secondary market performance for many deals.
BBVA's aggressive pricing on its second senior offering in two weeks may have damaged investor appetite for other Spanish financial credits.
"It would have been better to let the deal perform in the secondary market which would have then kept the door open for some of the second tier names," said a banker.
"Following the less-than-impressive deal I don't see that happening for a number of weeks."
At mid-swaps plus 325bp, the issue offered investors a 30bp pick-up to Santander, but accounts were more concerned that it came flat to the bank's secondary curve and only offered a 21bp pick-up to the underlying government curve.
"We are seeing a squeeze in concession which is making these deals look less compelling as the external market has already driven the most recent BBVA wider," said Ketish Pothalingam, portfolio manager at Pimco.
LTRO DEJA VU
Spanish issuers are now comparing the market's recent boom and bust to what happened after the second LTRO in February.
"I think as it happened with the LTRO, there is initially a short-term market rally caused by the market absorbing the good news," said a senior treasury official at a Spanish bank.
"Nevertheless, we have to wait for the stress test results and the potential sovereign bail-out in the near term. This uncertainty has stalled the first wave of issuance and the market is holding on to see if the uncertainties are resolved to take new positions."
In contrast to the post-LTRO rally which prompted around EUR4bn of covered bond issuance and a spat of senior supply, Spain's national champions have been focused on the unsecured market this time around.
Santander reopened the Spanish senior unsecured market in mid-August, after a six-month closure, selling a two-year deal at mid-swaps plus 395bp. The deal subsequently tightened by around 100bp in the secondary market and is now being held up as an example of how deals should be sold.
ING's analysts say the decision by Santander and BBVA to fund in the expensive senior unsecured market versus in Cedulas is a signal of the collateral strains many Spanish banks face.
But as macro difficulties rear their ugly heads and slam the market shut for Spanish banks investors are now painfully aware the impact the market is having on deal performance.
"The success of issuance from periphery country issuers is so much linked to the momentum of the underlying sovereign - when sentiment is good, markets are very welcoming. When sentiment turns negative then shorter-term holders tend to head for the exit," said Pimco's Pothalingam. (Reporting by Aimee Donnellan; Editing by Helene Durand, Alex Chambers and Julian Baker)
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