European banks make hay with Tier 2 rally

Fri Feb 21, 2014 9:28am EST

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LONDON, Feb 21 (IFR) - European banks are having a field day selling subordinated debt at the moment, as the hunt for yield keeps tempting investors down the credit curve.

Over the past few weeks conditions have improved dramatically in the Tier 2 market, with funding costs plunging thanks to rampant investor demand.

Swedbank this week saw around EUR2bn of demand for a EUR750m 10-year non-call five-year, while books on ING Bank's EUR1.25bn 12-year non-call seven-year hit nearly EUR5bn.

"We are seeing investors, as they look for yield, move down the credit curve," said Romke Van der Weerdt, head of capital strategy at ING.

"If they are comfortable with a credit, they are happy to buy in the subordinated format, as it gives them an enhanced yield."

And that is helping accelerate what has been a remarkable medium-term rally in the Markit five-year subordinated index, which has tightened from 530bp to 134bp since mid-2011.

Amid such strong demand, issuance of subordinated European bank debt is at its fastest pace in years.

Nearly EUR10.6bn equivalent has been sold in the euro and Yankee markets, in new and old style formats, so far in 2014 - multiples beyond the EUR1.79bn equivalent in all of 2013 and EUR2.94bn equivalent in 2012.

One of the bookrunners on the ING deal, which was led by BNP Paribas, Credit Suisse, Goldman Sachs and the Dutch bank itself, said the composition of the order book was almost identical to that of the bank's last senior issue.

"ING has a great credit story, the group has been through a thorough restructuring and have almost fully paid back their state aid - and investors clearly bought into this," said Hans den Hoedt, co-head of FIG DCM western Europe at Goldman Sachs.

"For investors, the level at which this priced was attractive and is a good way for them to ride the further expected spread tightening."

It was the first time since 2008 that ING tapped the euro market with a new Tier 2 deal, though it did raise Tier 2 last year as part of a liability management exercise.

The trade priced at 225bp over mid-swaps, 10bp tighter than initial price thoughts of 235bp area, and offered a mere 5bp to 10bp new issue premium, according to a banker on the trade.

SPREAD COMPRESSION

Swedbank was the other landmark trade for the Tier 2 sector this week, pricing at the tightest senior/subordinated differential seen for bank paper since 2010.

The EUR750m 10NC5 via Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, JP Morgan and Swedbank itself priced at 140bp over mid-swaps, a mere 75bp of where the bank would have priced a new senior issue, a banker on the deal said.

That amounted to a relatively small new issue premium of 8bp-10bp.

"Banks are having to adhere to a much higher capital ratio," another banker said.

"Therefore for investors, they would much rather own these names in subordinated format as it pays a lot more and they have a lot of capital beneath them."

Since November 2011, the senior/subordinated differential has compressed massively, going from 230bp to 55bp.

(Reporting by Helene Durand, Editing by Alex Chambers, Marc Carnegie)

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