January 15, 2010 / 6:08 PM / in 8 years

European banks tap U.S. market in refinancing drive

* Europeans dominate US supply via Yankee bonds

* Covered bonds market hits record level

By Alex Chambers and Jane Merriman

LONDON, Jan 15 (Reuters) - Europe’s banks have dominated a rush of new bond issues this month, including in the U.S. dollar domestic bond market, where they have made up the bulk of issuance so far this year.

As Europe’s banks start refinancing 935 billion euros ($1,349 billion) of debt falling due in the next three years they are looking for cash wherever it’s available.

Covered bonds have been in the spotlight as a relatively low-cost instrument to refinance and extend maturity profiles that became more truncated in the run up to the credit crisis.

Issuance of covered bonds, highly-rated securities backed by pools of mortgages or public sector loans, has reached 21.9 billion euros this month, according to Thomson Reuters data.

Senior unsecured issues by national champion banks and also some middle-tier institutions, have been a big feature in financial issuance in the first two weeks of the year.

Government-guaranteed issues have fallen away sharply. Government-backed bonds were a key source of funds for banks this time last year when the credit crisis froze financial markets.

European banks have made bigger inroads than usual into the U.S. dollar domestic bond arena, known as the Yankee bond market.

Issuers, which have included Barclays (BARC.L), Credit Suisse CSGN.VX, Deutsche Bank (DBKGn.DE) and Santander (SAN.MC), have sold some $16.55 billion of Yankee bonds so far this year, according to Thomson Reuters data.

European banks have made up the bulk of new issuance in this market, which has seen total issuance of some $24.57 billion, according to the data.

After the credit crisis, the bar has been lowered on where borrowers believe it makes sense to establish global debt or U.S. issuance programmes, said Jonathan Fine, managing director, US investment grade syndicate at Goldman Sachs.

“Back in 2006/7 that bar was set at maybe $30 billion of annual funding requirement, now I’d say it’s as little as $10-15 billion,” he said.

Yankee financial sector (bank) bonds are supplanting U.S. domestic bank issuance which Fine expects to remain subdued in 2010.


The US bond market has always been attractive to non-domestic issuers as it is the deepest liquidity pool.

But there is an added bonus for euro-based borrowers to sell bonds in dollars and swap the proceeds back to floating-rate euros.

    “There is a continued dislocation in the dollar/euro basis swap. It has been coming in, due to the sheer level of issuance, but for a two-year maturity is greater than 20 basis points,” said Fine.

    Frenetic bond issuance in January, also reflects treasurers’ fears that funding could become expensive if government bond yields rise.

    January’s rush is not even a function of concerns that credit spreads will widen but shows views on where yields are heading.

    “If you are a single A or BBB borrower the likely most volatile component of coupons over the next six months will be the underlying treasury rate rather than credit spreads,” said Fine.

    “Interest rate volatility will be an important factor to manage in 2010. The 50 basis points weakening in 10-year Treasuries during December made a lot of people sit up and think about the possibility of significant rises in long-term interest rates.”

    Average Triple B corporate bond spreads are 236 basis points, compared to 760 basis points at end-December 2008, according to Moody’s Capital Markets Research. 10-year Treasuries are at 3.8 percent, up by 1.3 percent on the year.

    That explains some of the front-loading of supply so far in 2010, bankers said.

    A year ago, large companies made a strategic decision to transform the composition of their balance sheets, replacing bank debt and commercial paper with longer dated bond finance.

    “The capital markets are eroding European corporates’ reliance on bank lending as their main form of financing,” said Larry Wiesneck, head of global finance and risk solutions, Barclays Capital.

    This has manifested itself in unusually high amount of high-yield bonds, including lots of unrated companies. Already 5 billion euros equivalent is being marketed or has already been issued, compared with 29 billion euros for the whole of 2009. (Editing by Sharon Lindores) ($1=.6931 Euro)

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