REFILE-BBVA bond hailed a triumph but investors fear trouble ahead

Fri Jan 4, 2013 10:26am EST

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(Refiles to clarify wording in paragraph five)

* Spain's 2nd biggest bank opens bank bond mkt in 2013

* Investors chase yield but fear big correction

* Sovereign's downgrade and fiscal cliff 2 risks ahead

By Aimee Donnellan

LONDON, Jan 4 (IFR) - BBVA's ability to attract a EUR5.5bn order book when it opened the senior FIG sector this week is hailed by bankers as a fresh sign of a normalising market, but some investors are wary a massive correction may be in store.

A five-year maturity, EUR5.5bn of demand and the fact the deal priced through the Spanish bank's secondary yield curve were seen as encouraging indicators in a market where peripheral labels are no longer seen as a scarlet mark of shame.

BBVA's capital and funding managing director Erik Schotkamp was certainly not complaining in the aftermath of the bond pricing and said the demand and quality of BBVA's order book speaks volumes about how well received this deal has been.

"The transaction proves that there is great appetite for names like BBVA that offer a lot of value right now for investors," he said.

The senior unsecured market has regularly closed since the financial crisis and Nordic, Dutch and German credits have typically been first to reopen it. So it is a measure of the recovery in financial spreads over the past 12 months that a bank from a weaker jurisdiction can open up the market too.

The senior financials index has tightened by 144bp since January 2012 when Rabobank opened the market in the New Year with a 10-year senior bond.

However, concerns surrounding Spain's Baa3/BBB-/BBB credit ratings and the fiscal cliff part 2 - likely in two months' time - are certainly preying on the minds of investors.

"The peripheral eurozone problems have not gone away," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.

"The OMT and Draghi's promise to do whatever it takes have helped but the underlying growth problems are still there and Spain is still teetering on the edge of being sub-investment grade."

Spain's economy has been in recession since the end of 2011, its second recession since 2009, and is expected to continue to contract until late 2013 due to anaemic domestic demand.

Despite these concerns, investors admit they have been chasing yield in some murkier parts, which has driven three-year Irish secured bank bond spreads in by 300bp to the high 200s and allowed Portuguese banks to break a two-year public market drought to sell unsecured debt.

YIELD HUNT

Portfolio managers say the rallying market in addition to the fact that end-investor clients expect a return on their money is ratcheting up the pressure to take up positions.

This was evident at the tail-end of last year, when Bank of Ireland managed to sell EUR250m of 10-year subordinated debt only 18 months after it had burned junior bondholders holding similar credit.

BBVA, it was argued, is a strong, well-capitalised and diversified bank that offered investors nearly 300bp over mid-swaps, which looks like good value if you can take the risk it slips from Baa3/BBB-/BBB+ to sub-investment grade.

A2/A+/A+ rated French bank BNP Paribas, offered investors a mere 75bp for five-year unsecured debt this week.

And many investors say that, despite taking the view that the current rally is coming to its end, they are comfortable with their ability to read the market.

"If things on the macro side turn down again, many think as long as they are not too overweight they will see it coming first," said Williamson. (Reporting by Aimee Donnellan; editing by Alex Chambers, Philip Wright)

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