AQR fears spur peripheral banks to front-load funding

Fri Apr 4, 2014 11:47am EDT

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* Fears of AQR contagion drive up funding volumes

* Italian lenders eyed as core of eurozone bank troubles

By Aimee Donnellan

LONDON, April 4 (IFR) - Peripheral banks have led a charge of debt issuance in the first quarter, seeking to avoid a rise in funding costs if pending European bank health checks do not go their way.

Investors have happily bought over EUR205bn of paper from financials, including some of the sector's weakest credits, as the current hunger for yield outweighs the risks of future losses.

The supply, from across the capital structure, has resulted in a much stronger start to the year than in 2013, when volumes were EUR61bn lower during the equivalent period, according to Thomson Reuters data.

"A lot of banks have already paid down their LTRO debt, and are looking to refinance redemptions early," said Mauricio Noe, managing director, financial institutions group at Deutsche Bank.

"As bail-in doesn't seem to be fully priced in yet, it makes sense to make hay while the sun shines."

The ECB is carrying out a wide-ranging review of 128 of the region's largest banks in an effort to address lingering doubts about their health before becoming their supervisor in November.

Ahead of these assessments, core and peripheral European banks are taking advantage of a bullish tone in the market out of fear that negative results from the asset quality review (AQR) could lead to contagion and higher funding costs.

Conditions have been ideal. The costs of insuring senior and subordinated debt are now at their lowest levels since 2009 and 2008, respectively.

"There's a lot of drivers pushing issuers into the market," said Damian Saunders, syndicate official at BNP Paribas

"Peripheral banks are finding the strongest support from investors hungry for yield, but there is demand for issuers across the market."

This was certainly the case for senior unsecured bonds from Greece's Piraeus Bank and Italy's Monte dei Paschi di Siena, which attracted more than 6bn of orders between them.

TROUBLE AHEAD?

Italian banks are setting aside billions of euros to cover for years of bad loans accumulated as the economy soured, in a long-overdue balance sheet clean-up. But investors say more is likely to be uncovered, which could lead to consolidation in the sector.

Investors explain that buying debt off lenders that were recently considered bankrupt may not seem rational, but with troubled banks steadily boosting capital levels, they are confident that troubled banks will be resolved without any negative consequences for senior bondholders.

If they are incorrect and bail-in is imposed, bankers fear this will result in higher funding costs for all Italian banks, including national champions as a result of contagion.

With this in mind, Italian lenders like Veneto Banca, MPS, UniCredit and Banca Popolare di Vicenza have been ploughing into the public market since the beginning of the year, selling a mixture of covered, senior and even the riskiest form of capital - Additional Tier 1.

"Investors definitely have more clarity on the value of core bank credit but are buying some of the weaker financials with a view that they will massively perform post-pricing," said a syndicate banker.

And as senior supply is expected to decline from the heavy volumes of Q1, investors are already preparing for the next yield hunt away from the flow market.

"High quality Tier 2 bonds are at the top of our wish list. You never know when the market is going to turn so while spreads are tight and there are still big macro risks out there it makes sense to be issuing debt," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management. (Reporting by Aimee Donnellan; Editing by Alex Chambers and Julian Baker)

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