Greece's NBG offers hope to periphery by pushing pricing boundaries

Fri Apr 25, 2014 11:26am EDT

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* Junk rated lenders and sovereign restructuring limit demand

* Greek lender breaks sovereign/bank "doom-loop"

* Bankers predict BBVA and Santander could price through Bonos

By Aimee Donnellan

LONDON, April 25 (IFR) - National Bank of Greece broke through a key psychological barrier when it priced its senior bond at a lower yield than the country's sovereign debt, raising hopes that other peripheral lenders will be able to follow suit.

The deal may have underperformed in the secondary market, but the 750m five-year deal priced at a yield of 4.5%, some 32bp lower than equivalent Greek government bonds. This suggests that banks may no longer be shackled to their sovereign's fortunes through the so-called "doom-loop".

"I think in the future we could see the likes of Santander and BBVA pricing senior debt through Bonos, but that is unlikely to happen in core Europe," said a FIG syndicate official at one of the deal's lead managers.

The financial crisis exposed the extent to which the fortunes of banks and sovereigns are interlinked. But now that the eurozone appears to be on stronger ground, investors say they will look at banks on an individual basis.

"The new institutional framework for banks in the eurozone could make a strong case for banks pricing through their sovereigns in the future," said Georg Grodzki, head of credit research at L&G.

"The banking union is trying to break the link between the sovereign and the banks, so credits are analysed on their own merits rather than those of their sovereign."

Banks' unsecured debt is typically priced at a concession to the underlying sovereign due to the perceived relative safety of government paper. For example, the large French banks trade around 50bp over their sovereign at the five-year point of the curve.

In Ireland and Portugal, banks typically trade around 130bp over, whereas Spanish lenders like BBVA and Santander have performed and now yield 10bp less than Bonos, albeit only at the longer end of the yield curve.

But in Greece the fact that banks managed to make it through the crisis without burning senior bondholders and are raising equity to boost their capital buffers is putting them on a firmer footing than the sovereign.

NBG is set to tap the international markets through a share offering. It plans to raise up to 2.5bn to plug a 2.18bn capital hole revealed via a central bank stress test in March.

Not all agree that the situation in Greece has wider ramifications across the eurozone, however.

"Greece is in a unique situation due to its sovereign debt restructuring," said Janusz Nelson, a FIG syndicate banker at Citigroup.

"Its banks now price through government debt which is not something we are seeing in Portugal or Ireland."

For now, investors say they will be looking at bank and sovereign debt on a case-by-case basis, which for Greece would mean that the banks are in a stronger position.

"There's still quite a bit of political risk in Greece and the memory of the sovereign restructuring is fresh in the minds of investors," said a DCM syndicate banker.

"It makes sense that a strong bank with revenues outside of Greece would price through the sovereign."

QUESTIONABLE RECOVERY

It must be said that the case for buying Greek bank debt is certainly not straightforward. Junk ratings and memories of the sovereign debt restructuring mean that the pool of investors looking to gain exposure to the country is still somewhat limited.

"There's clearly plenty of appetite for Greek risk but the recent supply  and the fact that NBG priced so far through the sovereign limited its appeal," said another DCM syndicate banker.

"This could be why we didn't see a 10bn-12bn order book for the trade."

Orders in fact totalled just 2.25bn, compared to the multi-billion books other peripheral banks have been able to attract in recent months.

NBG traded down by more than a point and was bid at 98.27 on Friday afternoon, having priced at 99.451.

The fact that NBG's bond buckled in the secondary market, seemingly under the pressure of recent supply of Greek risk, suggests that the market quickly suffered indigestion. (Reporting by Aimee Donnellan; Editing by Alex Chambers, Matthew Davies and Julian Baker)

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