* Investors buy into "repair phase" for European banks
* 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
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
"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.
TOO JUICY TO RESIST
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
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%.
US IS THE PLACE
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