5 Min Read
* Investors buy into "repair phase" for European banks despite complexity
* European banks seen as 2014's best spread compression play
* US market offers greatest depth of demand
By Danielle Robinson and Helene Durand
NEW YORK/LONDON, Jan 17 (IFR) - Credit Agricole demonstrated the extraordinary revival of enthusiasm for European bank credits when it attracted almost USD25bn of demand for a debut USD1.75bn Additional Tier 1 transaction.
Despite the deal's relatively complex two-trigger structure that initially had investors scratching their heads, nearly 900 accounts from the US, Asia and Europe scrambled for allocations in the 7.875% perpetual non-call 10-year deal.
"European banks are now just starting to clean up their balance sheets and bump up capital positions, and if you are comfortable with their credit improvement story then you want to be in securities that will enjoy the greatest amount of spread compression," said Matt Duch, senior portfolio manager at Calvert Investments.
Laurent Frings, head of credit research at SWIP in Edinburgh agreed, saying that banks had got over their biggest problems and that the "repair phase" would continue over the next 18 to 24 months.
"Earnings, quantum and quality of capital, liquidity and capital cushions to Additional Tier 1 trigger will continue to improve," he said.
Since the beginning of December, US bank spreads have rallied by 20bp-25bp (after huge spread compression over the past two years, US banks now trade inside of industrials).
And without much room for more tightening from that sector, investors have turned their sights on the rejuvenation of European banks as the highest yielding fixed income asset class, as well as the best spread compression play for 2014.
The need for yield also helped investors overcome any misgiving about the deal's 5.125% and 7.00% Common Equity Tier 1 triggers at bank and group level respectively.
"There were so many people that didn't understand this deal but blindly bought it anyway," said a person with knowledge of the deal. "There's a lot of interest in this product for one reason - the yield," the person added. "The high-yield market right now is an asset class that trades at 5.5% and here is a strong European bank issuing a BB+/BB+ security at 7.875%."
Credit Agricole's execution strategy helped to build the feeding frenzy. Instead of going out with whispers, the bank left New York on Tuesday evening with a shadow order book of more than USD4bn from about 150 accounts.
Although it had indications of interest under 8.00% from solid accounts, it fed demand further in Europe by announcing whispers in the 8.125%-8.375% range, slightly wider than the 8%-8.125% that US investors thought the issuer was leaning towards.
As New York opened on Wednesday morning, lead managers Credit Agricole, Barclays, CA-CIB, Credit Suisse, Goldman Sachs, JP Morgan and UniCredit said the book had built to USD20bn - with more to come.
"We came in on Wednesday morning and saw that the book had ballooned to USD20bn from USD5bn the night before - we couldn't believe it," said one buy-side account in the US. "After that, it was cash chasing cash."
Despite its added complexity, at 7.875%, Credit Agricole achieved the same coupon as Societe Generale's low 5.125% trigger USD1.75bn perpetual non-call 10-year priced in December, which was trading last week at 7.75%.
The size of the book and the deal's performance - it was trading at 102.5/102.75 on Thursday in New York from a par reoffer - has also underscored the US dollar market as the main place for European banks to raise Additional Tier 1 capital.
"The euro market investor base is getting more mature every day, but in terms of investor liquidity and depth of the market for this instrument, the US dollar market is the biggest and I expect it will remain that way for a while," said Vincent Hoarau, head of FIG syndicate at Credit Agricole CIB in London.
Although Credit Agricole believes it could have also done an equally successful deal in euros, albeit with a much smaller book, the big gap in the euro demand base is Germany.
Asset managers took up 61% of the deal and investors in the UK and North America together made up 71% of the book. The US took up 49% of the trade or USD850m, a lot more than the USD200m they took of the USD1bn 20-year non-call five 7.00% permanent write-down Tier 2 deal from Credit Agricole last September.
"We were impressed with the diversity of investor types that ended up in the book. We saw insurance companies participating and it was also interesting to see high-yield accounts coming into the deal," said Jean Luc Lamarque, global head of debt syndicate at Credit Agricole CIB in London. (Reporting by Danielle Robinson, Helene Durand, Editing by Matthew Davies)