* Attractive spreads generate multi-billion order books
By Alice Gledhill
LONDON, Sept 1 (IFR) - Investors clamoured for CaixaBank’s debut senior non-preferred bond this week, the first in the format to carry a sub-investment grade rating and a fillip for lower-rated issuers across Europe lining up to join the burgeoning asset class.
The Spanish bank sold its €1.25bn long five-year (Ba2/BBB-/BBB) just a day after its larger peer BBVA emerged with an inaugural €1.5bn five-year (Baa3/BBB/A-). Together they pulled in around €8.4bn of orders.
Investors have grown increasingly familiar with SNP debt throughout 2017 - a new asset class that enables lenders to build up their regulatory buffers in a cost efficient way.
France paved the way in late 2016, though BBVA’s deal was the first euro SNP from Spain since lawmakers made changes to permit this type of issuance in June.
CaixaBank’s reception was particularly revealing since it carried the SNP sector’s lowest rating so far - Ba2 at Moody’s. Sub-investment grade ratings can reduce the pool of potential buyers.
“ €3.5bn book is less than BBVA, but the split-rated debut of the Catalonian champion reconfirmed the general desire by investors to get involved in the higher yielding non-preferred sector from peripheral countries,” said Armin Peter, UBS’s global head of syndicate.
At swaps plus 95bp CaixaBank priced 25bp back from BBVA. It trades around 20bp back in preferred senior and around 50bp back in Tier 2, which a banker away said implied there is “zero penalty” for a sub-IG rating.
That will be music to the ears of banks such as Bankia and Sabadell. Bankia’s SNP debt is likely to be rated BBB- by Fitch, for example, but Ba3 by Moody’s.
BBVA drew some €5bn in orders despite offering little or no concession, underlining the wealth of demand for the product despite being specifically designed as loss-absorbing capital.
“In the context of spreads being tighter and there being plenty of potential supply around the corner more broadly, a huge book at 70bp over is a pretty good affirmation,” said a lead on BBVA.
SNP debt emerged in response to new banking rules forcing institutional investors to take the hit in future crises rather than taxpayers. The bonds would be bailed in after Tier 2, but ahead of senior preferred.
“I find it amazing that something that is actually subordinated, because it’s been branded senior, is now being lapped up by those that originally scoffed at the thought of it,” said Lloyd Harris, a portfolio manager at Old Mutual Global Investors.
“But they probably buy for the same reason we always have, in that the actual probability of default in healthy large-cap banks at this point in time is very, very small.”
SNP spreads also appear attractive compared to other instruments. BBVA for example came at 123.8bp over Bunds, which looks good versus corporates and squeezed preferred senior.
“From that perspective, if you have cash to spend it’s not a bad place to put it,” Harris said.
The fact that senior has been left intact in recent bank failures, including Spain’s Banco Popular and two regional Italian lenders, has enforced the view that the asset class is sacrosanct - but not everyone agrees.
“SNP is not trading wide enough in my view,” said a second investor. “It should be closer to Tier 2 than senior.”
BBVA and CaixaBank are the prelude to what many see as an imminent broadening of the asset class.
Fitch estimated in July that the 10 largest Spanish banks after Santander and BBVA, including the likes of Sabadell, Bankinter and Ibercaja, will have to issue around €43bn in total to meet their MREL targets - the loss absorbing standard with which European banks must comply.
Santander jumped the gun in January due to its large requirement with a form of contractually subordinated senior. It is expected to return and has signalled an up to €20bn SNP target for 2017 alone.
Belgium’s Belfius is seen as a hot contender to follow after Belgium made the requisite legal changes earlier in the summer. The bank said this week it will issue one to two SNP benchmarks per year.
Nationwide Building Society is also a future candidate, having indicated it could issue SNP to make up shortfalls of loss absorbing debt if the regulator allows it. Italy and Sweden are also expected to follow in time.
One factor holding some issuers back, however, is a question mark over the final calibration of MREL.
“For us, the most difficult topic was to explain to investors the expectation we may have on the requirement – we do not have the desired clarity,” said a BBVA spokesman.
The bank thinks an interim requirement is likely based on precedent related to TLAC, a similar set of rules for the world’s largest banks, and UK rules for MREL.
It therefore guided investors towards €1bn-€2bn of SNP issuance in 2017. It intends to refinance €2.5bn-€3.5bn of preferred senior and covereds into SNP next year - that would create a €3.5bn-€4.5bn SNP buffer by the end of 2018, counting towards a potential interim requirement.
Despite the shift in its funding base, BBVA intends to maintain a presence in the covered market.
“They are a very useful instrument,” the BBVA spokesman said. “Perhaps now it doesn’t make much sense to tap the market with covered bonds due to the existence of TLTRO, and these MREL requirements, but they have a lot of value.” (Reporting by Alice Gledhill, editing by Alex Chambers and Julian Baker)