European banks turn to Yankees
By Danielle Robinson; Aimee Donnellan
LONDON, Sept 23 (IFR) - European banks are turning their sights on the US Yankee market again as a rally in spreads makes pricing about as good as it gets in euros, and in the case of subordinated debt more than 50bp better than in any other currency.
Last week, HSBC, issued USD1bn of five-year fixed and floating-rate notes and Svenska Handelsbanken USD2.5bn of three-year and five-year securities at levels that were compelling when compared with euros, according to underwriters.
European banks were largely absent from the senior unsecured Yankee market from mid-May to late-August, when BNP Paribas issued a USD1.25bn 2.7% five-year offering on August 13 and Abbey National issued USD1bn of five-year 3.050% notes on August 20.
The euro market outperformed dollars in terms of spread-compression in the summer months. Although basis swap levels have not turned in the dollar market's favour since then, US spreads have played catch-up and are now especially compelling after a 10bp tightening last week following the Fed's no-taper news.
"European banks are now finding that the US dollar market has become more competitive from an economic standpoint against other currencies and more importantly provides greater depth for larger-sized transactions," said Dan Mead, head of FIG syndicate at BofA Merrill.
But it was ING that stole the limelight last week, when it attracted about USD6.75bn of demand for its USD2bn 5.8% 10-year subordinated Tier 2 bonds, even after tightening in pricing to 300bp over Treasuries, about 25bp-30bp tighter than initial price thoughts.
"The US dollar market provides the most efficient pricing," said Johannes Wolvius, group head of capital management at ING, in explaining his market choice. "Pricing was roughly 60bp-70bp better than in euros, according bankers who sold the deal."
"European banks are now finding that the US dollar market has become more competitive from an economic standpoint against other currencies and more importantly provides greater depth for larger-sized transactions" The price of 300bp over Treasuries swapped to 285bp over Libor, which swapped to 255bp over Euribor. New subordinated debt in euros would have cost around 312.5bp over mid-swaps, according to one banker close to the deal.
The ING deal made Commerzbank's USD1bn 10-year subordinated 8.125% offering the week before look less freakish. US investors are clearly more willing to look at European banks with improving credit stories.
"Commerzbank is a name that investors would not have taken to six to 12 months ago, but it showed a dramatically improved balance sheet and investors are generally more comfortable with the European landscape," said one market source.
Commerzbank paid about 37bp or more in new issue concession, but given the much larger senior subordination premium in euros than in dollars it still saved money - and got good size - by issuing in dollars.
"In the sub debt space there is great funding advantage in US dollars versus euros," said one FIG DCM banker. "First, the depth of distribution is so much greater in the 144A/Reg S markets and, second, the senior/subordinated premiums are generally better here than in euros."
Underwriters based in the US, anxious to get their share of the estimated EUR36bn of Tier 2 debt European banks need to issue each year for the next five years, are using the ING and Commerz deals as a reason for putting in calls to other potential issuers.
"I think, following from Commerzbank and ING, other banks will look to follow suit and take advantage of a lot of demand for capital deals," said Gerald Podobnik, head of capital solutions at Deutsche Bank.
"US investors like classic structures from well-known European names that are offering yield. Right now it definitely pays to go to the US, even if the documentation process can be a bit more labour intensive."
ING and Commerzbank's deals have also performed strongly in the secondary market, benefiting from a 20bp-plus rally in bank sub debt deals over the past week.
ING's 10-year was trading in the high 280s on Friday and Commerzbank's deal was about a point in dollar price above par late in the week.
It is still a struggle, however, to get traction with US institutional investors for anything that is not a 10-year bullet structure, as Credit Agricole discovered a fortnight ago when it sold only USD200m of a USD1bn 20-non-call five high-trigger Tier 2 deal to US-based investors.
Credit Agricole paid 8.125% on the same day that Ba2/BB+ rated Commerzbank paid 8.125% for its 10-year subordinated Yankee bond, even though the French bank's deal was rated A2/A. It was not the credit, but the structure that investors had trouble with.
"The CoCo is a structure that is difficult for traditional investment-grade bond buyers, and the icing on the cake in the Credit Agricole deal was the ratings agency step-down," said David Knutson, FIG strategist at Legal & General Asset Management Americas.
"At the moment, I think the more funky structures, like the Credit Agricole deal, are being largely bought by the dedicated preferred funds and levered funds," Knutson added.
Even so, the prospect of an extended period of low rates in the US, thanks to the Fed's surprise decision not to begin withdrawing from its bond buying programme in September, should help callable structures from European banks become increasingly attractive.
"I think the Tier 2 market is going to be pretty robust and I think a lot of the European banks would like to issue subordinated debt in this market because it has depth," said Knutson.
"I also think the Additional Tier 1 market in dollars will start to gain pace later in the year or early next year, because they will offer chunky coupons, and it's pretty obvious that there's still a very strong desire to boost returns and to take on more risk to get it."
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