CaixaBank offers succour to Tier 2 after widening

The execution and performance of a EUR1bn 12 year non-call seven Tier 2 issue for CaixaBank on 10 April raised hopes that volatility and spread widening that had inflicted the market since mid-March could finally be coming to an end.

A wave of some EUR28bn of FIG issuance in the first two weeks of March prompted a deterioration in conditions from the middle of the month and although issuers were still able to take out size from the market, new issue premiums and absolute spreads rose, and secondary curves were hit in a vicious circle of weakening.

ING, for example, approached the market for Tier 2 on 15 March when the shift in the balance of power from issuers to investors was in full swing, and although it could raise $1.25bn of 10NC5 and EUR750m of 12NC7 debt, pricing was only tightened by 5bp from initial price thoughts despite elevated new issue premiums already being offered in a widening market.

“ING’s Tier 2 repriced the Dutch subordinated curve by 10bp-15bp,” said a syndicate banker away from the leads. “Price distortions between primary and secondary have increased, with primary driving secondary, and each new issue repricing the relevant secondary curve.”

By the time CaixaBank approached the market almost four weeks later, spreads were more stable, albeit at wider levels, and the Spanish issuer was able to attract over EUR2.3bn of orders from more than 180 accounts to its EUR1bn Tier 2 trade, and tighten pricing from IPTs of the 180bp area to 168bp over mid-swaps.

“The market was in OK shape — neither particularly strong, nor particularly bad — yet they managed to have EUR2.1bn good at re-offer after tightening by 12bp and for a EUR1bn size,” said André Bonnal on Crédit Agricole CIB’s FIG syndicate desk.

“Scope for compression and performance strongly helped this trade and probably explain why it did not reprice the Tier 2 market — if you look at CaixaBank’s own Tier 2s, they only moved 1bp-3bp on the day. And the deal even performed in the secondary market, trading at 161bp a couple of days after launch.”

With many European banks heading into blackout periods until the beginning of May, the better tone is set to be supported.

“The market is much firmer than it was two weeks ago,” said Bonnal. “Secondaries have widened to a lot more reasonable levels than they were before and market conditions are quite constructive — we know that volatility is here to stay and we always have Trump to add to that with a tweet, plus NIPs should remain elevated. I don’t want to be too optimistic, but things look quite good versus where we were these past three to four weeks.”

DNB hits the top

The Tier 2 sector’s peak was marked by the launch of a EUR600m 10NC5 Tier 2 issue for DNB that achieved the tightest spread of a euro Tier 2 issue since 2007 on 13 March, two days before ING hit the market’s inflection point.

“I could brag about picking the perfect timing, but sometimes you are lucky, too,” said Thor Tellefsen, head of long term funding at DNB.

“We thought it was an OK-ish day, we didn’t think it was a 10 out of 10, but how often to you find 10 out of 10 days? So we decided to go, and then we ended up very nicely.”

The record spread of 77bp over mid-swaps for the EUR600m (NOK5.75bn) 10NC5 Tier 2 followed initial price thoughts of the 90bp area and guidance of the 80bp area, with books totalling EUR1.3bn. However, according to Tellefsen, even at that point the market was already feeling somewhat softer.

“It was a slightly different experience than what we have typically seen in previous capital transactions,” he said, “and a lot of other issuers out at that time told us likewise. For example, we announced at around 9 o’clock and two hours later we sent out a book update of EUR800m, so rather a slow start from a DNB perspective — people are not necessarily just banging in orders anymore; they are sitting and considering a bit more.

“But ultimately the book grew further and reached EUR1.3bn with more than 100 investors.”

DNB’s issue was caught up in the subsequent widening, but by mid-April it was trading back inside re-offer.

The Norwegian bank’s deal took the spread record from a Svenska Handelsbanken EUR750m 10NC5 Tier 2 that had on 23 February been priced at 80bp over.