September 6, 2013 / 4:16 PM / 4 years ago

AIB and Banco Popular highlight peripheral funding woes

4 Min Read

* Irish and Spanish banks find limited demand for covered bonds

* Investors wait for guidance from FOMC

By Aimee Donnellan

LONDON, Sept 6 (IFR) - The difficulties Allied Irish Banks and Banco Popular Espanol faced accessing the public market this week, despite offering secured bonds, have prompted renewed fears that weaker eurozone peripheral banks will still require long-term ECB funding.

Both issuers offered coupons of over 3% but struggled to attract significant demand, despite neither being a jumbo (EUR1bn) sized bond. BPE just managed to cover its EUR750m four-year issue with over EUR800m of orders, while AIB only managed to build a EUR650m book for its EUR500m five-year offering.

The results of both deals came as something of a shock to a covered bond market that had become accustomed to peripheral banks attracting high levels of interest for their deals.

"I would have expected to see a lot more demand for these names considering the yields they were offering, but Banco Popular and AIB just show how much uncertainty there is in the market," said a syndicate banker.

Bankers say the FOMC meeting, scheduled to take place September 17-18, is the main reason for investors' lacklustre response, with some wanting more clarity on interest rates before taking on new positions.

Issuers concede that the weak market backdrop, even for a safe format such as covered bonds, means banks' funding options could become limited.

"The market is very different for peripheral issuers now than it was during the first three months of the year," said Sean Cremen, head of wholesale treasury at AIB.

"We have had a very strong rally in Irish ACS, and while there is ongoing demand for credits like AIB to print deals at current levels, the size of the order books are unlikely to be as large as in the previous deals."

Jittery Market

The renewed challenges for peripheral banks could not have come at a worse time. In Spain, the country's lenders had been diligently weaning themselves off ECB support, cutting their net borrowings from the central bank for the 11th consecutive month in July.

Similarly in Ireland, bank borrowing from the ECB fell in July to its lowest level since September 2008.

But this week's uninspiring results could deter others from the public market, and unless the Fed delivers a surge of confidence in mid-September, they may face even lower demand for future offerings.

Peripheral banks have been improving their funding positions, pricing bonds in both the senior and covered markets, and in Ireland, Bank of Ireland even managed to remarket a high risk CoCo in January.

But since the global sell-off that began in late May, when the Federal Reserve indicated that it will taper its bond buying programme, the cost of insuring financial debt - as measured by the iTraxx Senior Financials index - has risen by more than 60bp to 188bp (level taken from Tradeweb).

And although the index has recovered some of those losses, bankers are concerned that investors are now wary of weaker credits in Europe's periphery.

"Quite a few investors didn't buy BPE due to the fact that they think Spain might suffer another downgrade that would make this offering sub investment grade," said an DCM banker.

"Both AIB and BPE are from difficult jurisdictions, so when there is uncertainty in the market investors tend to want to limit their exposure."

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