* Demand for peripheral bank debt dwindles as spreads tighten
* Investors see limited further tightening potential
* Bankers welcome high-grade like execution
By Helene Durand
LONDON, May 2 (IFR) - Peripheral banks, used to paying generous new issue spreads compared to banks from the eurozone core, have become victims of their own success, and overwhelming demand for their bonds has withered in recent weeks as spreads have tightened.
Until very recently investors could not get enough of peripheral debt, but they have now started to pull back, worried by the limited upside.
Combined demand for benchmark deals from Banco Espirito Santo (BES) and Bank of Ireland reached only 3bn, just double the amount sold by the duo, and a far cry from the multi-billion books that peripheral banks were enjoying earlier this year.
"A lot of the value has been eroded out of the market and we have come a long way in quite a short time," said Robert Montague, a senior investment analyst at ECM Asset Management.
"While the backdrop has improved for these banks, you would need to see further improvement in the economies for spreads to tighten further."
Investors' desperate hunt for yield in recent months has facilitated the rehabilitation of peripheral banks in the market. Some order books reached as high as 8bn, which has in turn repriced borrowers' curves, but the fever now looks to be easing.
Bank of Ireland, although rated one notch higher by Moody's than when it sold a 500m three-year bond in May last year, is still firmly sub-investment grade at Ba2. But this week's deal came 120bp tighter.
Laurent Frings, head of credit research at SWIP, now part of Aberdeen Asset Management, said: "We haven't been active at all in the recent periphery issuance as a result of our general aversion to this area and the limited value, in our view, that it offers, especially in senior instruments."
It was a similar story for BES, with spreads on its latest deal some 332bp tighter than in October 2012, when it priced the first senior deal from a Portuguese bank since the financial crisis. BES has been rated Ba3/BB- for the entire period.
"The market is taking a bit of a pause for breath and as liquidity gets withdrawn by the US central bank, people tend to be a bit more wary and things are not quite as frenzied," said ECM Asset Management's Montague.
He said the performance of the recent deal for National Bank of Greece had been a bit of a reality check for the market.
The 750m issue was only three-times subscribed, a far cry from the six-times covered book for Piraeus's 500m three-year deal that priced in the middle of March.
Furthermore, NBG is still trading below reoffer at a yield of around 4.69%, according to Tradeweb, having priced at 4.5%.
LESS IS MORE
As always, however, syndicate bankers see a silver lining. NBG's performance may have taken some of the steam out of the market, but most argue that this is a good thing.
"These deals are now pricing like high-grade transactions, and this is a positive development for these issuers," one said.
"Bank of Ireland was the tightest print for an Irish senior since the crisis, which means that a lot of the pure yield players are not participating anymore. We are now seeing more real money reengaging in these names as they see them stabilise."
Another added that the increasing number of data points on the curve made it easier to pin-point pricing for new deals. "I don't think the peripheral party is over, it's just a lot easier to do relative value and it's purely about interpolation now, which is a totally different from when the whole periphery started coming back to life."
Others argue that spreads in the periphery are more likely to tighten than those in the core. "I can guarantee you that a deal for a core issuer that prices at 30bp over mid-swaps today won't be trading 20bp through in six months," a banker said. "However, it's not impossible that BES's deal at 208bp over will be at 160bp in the same time period." (Reporting by Helene Durand, Editing by Alex Chambers, Julian Baker)