Bankinter signals sea change in Spanish prospects

Fri Oct 19, 2012 7:56am EDT

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LONDON, Oct 19 (IFR) - The hefty interest shown by international investors for Bankinter's covered bond this week has revived hopes that other second tier peripheral banks are now on a firmer footing to fund in public markets.

The Spanish lender was swamped with over EUR3.2bn of demand from some 160 investors for its EUR500m three-year transaction, which priced on Thursday at mid-swaps plus 335bp, some 20bp inside where the bond was initially marketed.

The results of the deal, expected to be rated A3/A by Moody's and S&P, are all the more notable given the failure of Italy's Banco Popolare to sell a senior unsecured issue last week.

The Baa3/BBB-/BBB rated Italian bank struggled to find demand for a long three-year deal, despite the impressive order book built by rival Intesa Sanpaolo during the same week.

"There has been a massive change in fortune for Spanish credit," said a lead manager on Bankinter that was led by Bankinter, JP Morgan, Natixis and Nomura.

"Investors are aware how difficult it is to get any kind of paper in this market, and with Moody's decision on Spain, a number of accounts have changed their outlook on peripheral credit from negative to neutral."

An investor shared that view and said that deals like Bankinter show there is still a lot of value in Spanish banks while the sovereign remains investment grade.

Moody's maintained Spain's credit rating above junk earlier this week, the driving force behind the improvement in the country's government and bank spreads, which have rallied by 80bp and 50bp respectively.

"Bankinter came at the exact right moment and with so much cash floating around the market, and few places to put it, Bankinter's offer was compelling," the investor said.

INTERNATIONAL SUPPORT

The distribution of the bond highlighted its international appeal. Domestic accounts took a little over a fifth of the deal, while the bulk was distributed throughout Europe with asset managers proving the most receptive investor type.

"This is the first time this year we have seen a second tier Spanish name attract such international attention," said a banker.

Up until now, credits like Sabadell and Banesto, that sold deals following the second LTRO, were forced to rely on domestic support as well as the covered bond purchase programme (CBPP2) to get their deals away.

While market sentiment was largely positive, some analysts thought the pricing was off. Bernd Volk, head of covered bond research at Deutsche Bank said the new three-year was too wide at plus 335bp relative to senior CDS at around 350bp at the time of pricing.

Lead managers, however, referenced Bankinter's March 2017 deal which was bid at mid-swaps plus 360bp, saying the new deal at plus 335bp was flat to fair value on a curve-adjusted basis.

The reoffer level gave a 60bp pick-up to the Spanish sovereign, and the deal has continued to perform in the secondary market, now trading 25bp inside reoffer.

The performance and the demand the deal received are likely to bring other banks out of the woodwork, and a number of bankers believe CaixaBank is an obvious contender.

Away from Spain, UniCredit's EUR250m covered bond tap this week could encourage Italy's Popolare to resurrect a sale of unsecured debt, perhaps in a shorter maturity and with a heftier spread.

However, bankers say the two-notch downgrade of Monte dei Paschi di Siena to junk this week is likely to stall any near-term plans.

On Thursday, Italy's oldest bank's Baa3 rating was cut to Ba2, as Moody's said there was a material probability that the borrower would need another cash inject from the Italian government. (Reporting by Aimee Donnellan; Editing by Helene Durand & Julian Baker)

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