European banks prepare for dollar splurge

Fri Apr 19, 2013 6:27am EDT

* Yankee paper in demand as US investors move down the credit curve

* Bankers circling French, Italian and Spanish borrowers

* Swift execution advised to avoid potential volatility

By Aimee Donnellan

LONDON, April 19 (IFR) - European banks are preparing to hit the US market to take advantage of competitive pricing levels at a time when US investors have a more positive outlook on the region's banks.

Bank deleveraging has capped senior and covered supply in general, but the drop in Yankee supply has been even more acute.

So far this year, Yankee issuance from European banks stands at USD16.5bn, according to IFR data, down almost 42% from the same period a year ago when the region's banks sold a total of USD28.35bn to mainly US investors.

That could all be about to change, driven by US investors' desire to move down the credit curve in search of yield, which has created a competitive backdrop for eurozone issuers.

BBVA's USD2bn five-year deal from last October has rallied by nearly 160bp from its Treasuries plus 435bp pricing point - an impressive performance considering US investors had boycotted Spanish bank debt for the 17-month period leading up to the issue.

"There are only two ways to make money this year - through buying subordinated debt in issuers that you like, or by getting comfortable with peripheral banks and positioning yourself for a convergence trade between peripheral and core banks where Spanish and Italian banks will be the biggest beneficiaries," said a London-based DCM banker.

Growing confidence that the sector is past the worst - especially national champions - is also a supporting factor, bankers said.

Lucette Yvernault, global credit portfolio manager at Schroders, also expects eurozone banks to access the Yankee market in the near future.

"The US investor base is looking to eurozone banks for supply because they are desperate for yield and dollar funding is quite competitive these days," she said.

SHOPPING AROUND

European banks raise dollar debt to finance US assets, for diversification, and sometimes because of lower costs.

Natixis parent BPCE and Credit Agricole are the latest banks to take advantage of the better tone. BPCE made a brave foray into the market on Thursday with its first index-eligible offering, while Credit Agricole priced USD1.4bn of senior debt last week, paying slightly less on a post-swap basis than a euro deal would have cost.

Bankers are now circling BNP Paribas and Societe Generale to urge them to follow suit. Italy and Spain are also on investor buy lists, after some made stellar returns from BBVA and Intesa trades last year.

"We've seen a number of Yankee deals price inside of where they could get euro funding which has led to a bit of a revival of issuance," said Marc Tempelman, co-head of EMEA Financial Institutions Corporate & Investment Banking at Bank of America Merrill Lynch.

"Investor sentiment has definitely turned positive towards eurozone banks and peripherals in particular where investors are showing a greater distinction between credits and jurisdictions."

The opening of the US dollar debt market means banks can now shop around for competitive funding costs, bringing down their net interest costs.

CAUTION REMAINS

Credit Agricole's recent Yankee venture may have allowed the French bank to slightly cut its funding costs, but the deal also highlighted that some investors still have trouble with the eurozone recovery story.

Some passed because of concerns that eurozone bank regulators could direct banks to give depositors preference over senior unsecured bond holders in a restructuring.

One investor said he was also wary of Credit Agricole's exposure to a variety of different European countries outside France and the fact that it has a large retail base.

These concerns are by no means confined to Credit Agricole, and are likely to become more commonplace if volatility picks up in the eurozone and the threat of senior bail-in increases.

"For banks that have funding needs we are advising them to do it sooner rather than later. There are only a number of windows to sell deals into, and US investors have proven to react quickly to market concerns," said a syndicate banker.