Expectations high after year-end upside surprise

Financial institutions issuance enjoyed an unprecedentedly buoyant year-end in 2016, with a trio of European issuers selling Additional Tier 1 (AT1) instruments in a variety of formats, and 2017 is also expected to open with an historically high level of activity.

Mario Draghi ECB 8 December

In spite of the traditional year-end overall winding down of supply, BNP Paribas reopened the AT1 market on 7 December with a $750m 6.75% perpetual non-call 5.25 year deal. Issued off the back of reverse enquiries, the transaction ultimately attracted some $6bn of orders. Swedbank then took advantage of the apparent demand for the asset class two days later to sell a $500m 6% perpetual non-call 5.25 year deal on the back of almost $3bn of demand.

The extent to which the market remained open was then highlighted by a Eu500m AT1 private placement by UniCredit on 14 December, just 10 days after prime minister Matteo Renzi’s loss in Italy’s constitutional referendum and resignation, and in the midst of efforts to support Banca Monte dei Paschi di Siena.

“UniCredit decided to proceed with the transaction after the positive market response to their 2016-2019 strategic plan, Transform 2019, announced yesterday and to continue to strengthen its capital base especially in view of the new SREP which will now factor in a Tier 1 and Total Capital Ratio requirement,” said the bank.

The perpetual non-call 5.5 securities were priced with a coupon of 9.25%.

“It just demonstrates the appetite for high beta instruments with high coupons in a context where you clearly see and feel that the quantitative easing in place keeps on delivering in full effect,” said a syndicate banker.

Indeed, the delivery of an anticipated extension of the European Central Bank’s asset purchase programme on 8 December to at least December 2017 maintained market confidence, even if a reduction in buying from Eu80bn to Eu60bn per month led to a semantic discussion over whether or not this constituted any tapering.

In the midst of the AT1 activity Crédit Agricole and Société Générale on 13 and 14 December, respectively, launched the first French senior non-preferred deals (see separate news article and case study), attracting an aggregate Eu8.5bn-plus of demand for their Eu1.5bn 10 and Eu1bn five year issues.

“The good news obviously came from Draghi on the 8th, with the extension of QE,” said Vincent Hoarau, head of financial institutions syndicate at Crédit Agricole CIB. “It was apparent in early December that the market is extremely liquid, with many investors not necessarily keen on delaying investment and waiting until January — which is a little bit surprising, but we witnessed that on BNP, Swedbank, UniCredit — despite the Italian context — and thereafter CASA and SG.

“To be frank, it was quite amazing for the late time of year, but the success of these deals is very promising for the beginning of 2017.”

The French bank itself on 27 December mandated a dollar follow-up to its senior non-preferred opener and Hoarau said he understands other issuers to be targeting similarly early issuance.

“I expect, more than ever, borrowers to front-load massively in January,” he said. “I can see it already from the number of calls we had mid-December with issuers even willing to test the market just after our senior non-preferred transaction.”

The rationale for the front-loading could, however, ultimately lead to spread widening and is furthermore based partly on concerns about hiccups further into the 2017 calendar.

“We don’t know what is going to happen after Trump’s inauguration on 20 January, and then you have the Dutch election [March] and French election [April], where you could have some bad surprises,” said Hoarau, “and we all know that tapering will definitely be a topic again at the beginning of Q2. You could therefore have some volatility on the govvie front, which could trigger a spillover into covered, then senior and into higher beta instruments. Meanwhile, supply in TLAC/MREL-eligibile instruments may be excessive.

“So I suspect everyone will try to do all they can before they enter their black-out periods in January.”