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
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.
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
"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