Brexit, Italy prove too hot to handle as deals suffer

A row between the Italian government and the EU over the peripheral country’s budget and then the climax of the UK’s Brexit negotiations presented issuers and investors with a veritable minefield of events to navigate from October into November, with inevitable casualties.

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“The Brexit noise and Italy have certainly provided investors with a pretty decent cocktail of reasons not to be willing to buy into risk,” said George Kalbin, director, FI syndicate, at Crédit Agricole CIB (CACIB).

As a result, few issuers ventured into the subordinated debt market across the two months. The risks of doing so were evident when BNP Paribas entered the market on 13 November despite US equities having fallen overnight and with temperatures again rising in the Italian budget saga.

The French bank went out with initial price thoughts of the mid-swaps plus 190bp area for a 12 year non-call seven Tier 2 trade, rated Baa2/BBB+/A-, and was only able to tighten pricing by 5bp to 185bp on the back of EUR675m of demand, with bankers away from the deal noting the ultimate EUR500m size was smaller than they would have expected from BNP Paribas. This was in spite of a new issue premium that one syndicate banker put as high as 25bp.

Other deals launched out of Europe in other sectors experienced similarly lacklustre demand, with bankers noting that some investors were already shutting up shop, unwilling to risk further negative performance in 2018.

“We were surprised that a few accounts are saying they are done for the year,” said a syndicate official involved in one trade.

Kalbin at CACIB said he was surprised to see BNP Paribas hit the market.

“The market was only going one way,” he said, “i.e. deteriorating, where nobody should have pulled the trigger. I’m sure they didn’t expect things to go that way, but as soon as they pushed out the trade they got punished.”

BNP Paribas was at least able to execute a benchmark-sized subordinated trade; earlier in the autumn volatility two smaller issuers pulled debut Additional Tier 1 trades within days of each other.

Volksbank Wien opened books on a planned EUR150m perpetual non-call five AT1 on 4 October, with IPTs of the low 7% area, only to postpone its issue citing unstable market conditions. The Austrian bank said it would await the return of more stability to ensure successful execution for issuer and investors alike. The AT1 had an expected rating of Ba2 from Moody’s.

The following Monday, 8 October, Van Lanschot went out with IPTs of the 6.5% area for an inaugural EUR75m-EUR100m perpetual non-call five AT1, with an expected rating of BB from S&P. The Dutch bank then also pulled its trade.

“To be honest, it was a little bit surprising to see them on screens after Volksbank Wien pulled just a couple of days beforehand,” said a banker away from the deals. “I was sceptical about them proceeding in such an uncertain market.

“You have to bear in mind that both Volksbank Wien and Van Lanschot are, firstly, sub-benchmark AT1s,” he added, “and secondly, they are non-listed banks, both of which limit the amount of investor interest you might see in these issues anyway.”

The best laid plans

While the two unfortunate issuers may have suffered the most public travails in the sub debt market, others were reportedly close to pulling the trigger only to pull back at the last minute.

“There were Tier 2 and AT1s planned that didn’t come to market,” said CACIB’s Kalbin. “Obviously issuers are regularly monitoring the market and may decide to issue or not, but the difference here was that the banks were mandated and the docs and term sheets were ready, but then the numbers went away from you.

“That has happened a lot since September and even more so since October. I’m sure the market conditions have clearly affected the overall funding expectations of some issuers, at least when it comes to doing a trade after Q3 results.”

The unreliable markets proved most challenging — beyond smaller issuers — for peripheral credits.

“I’m sure a lot of people wanted to do a lot more in senior non-preferred, Tier 2, AT1, but it feels like you could only get away with a deal if you are a national champion — and I’m not even talking about Italy,” said Kalbin, “or the very small issue sizes.

“And at the same time you have plenty of issuers who probably thought, OK, I would like to come to market, but I’ll never get sign-off from the board at these levels.”

The middle two weeks of November were cited as a particularly painful time for subordinated debt in the secondary market. Among peripheral credits, Intesa perpetual non-call fives, for example, widened some 100bp to 770bp over — their widest level of the year. Italian credits had nevertheless already been trading at heightened spreads given their specific backdrop, and some other peripherals widened even more over the same period, with Bankia perpetual non-call fives issued in September (see below) widening from around 575bp over to above 700bp, before recovering to trade inside that level.

At the other end of the spectrum, a Rabobank EUR1bn 4.625% perpetual non-call 7.25 issue, which had reopened the AT1 market on 4 September, widened some 40bp to trade at 390bp over.

And Tier 2 suffered in secondary as well as primary, with UK names unsurprisingly among those hardest hit. A EUR750m 10.5 non-call 5.5 Tier 2 sold by Lloyds at 130bp over mid-swaps in February was quoted at 360bp.

Indian summer proved fruitful

Lloyds had in early October been among issuers to find some respite from Europe’s troubles in the US dollar market. On 2 October the UK bank printed a $1.5bn (£1.17bn, EUR1.32bn) perpetual non-call seven AT1 and the Baa3/BB- deal was priced at 7.5% following IPTs of the 7.75% area.

“That was a really good move considering the fact you’ve had them taking quite a beating in the market over the past two weeks as well,” said a syndicate banker.

The trade came amid a raft of supply in US markets, and one syndicate banker suggested the dollar market was decoupling somewhat from the vagaries of European politics.

“I guess we don’t need to worry if the European markets stay volatile for a little longer in the coming weeks,” he said, “going through the Italian budget and Brexit saga, as well as the Bavarian election.”

However, Lloyds’ deal remained the last AT1 from a European issuer to be completed by late November, whether in euros or dollars, and potentially until year-end.

The volatility meanwhile meant that the euro market did not see a benchmark AT1 after 18 September, when BBVA issued in what might now be seen as halcyon days, where the most pressing issue facing markets was a potential global trade war.

The Spanish bank could price a EUR1bn perpetual non-call five AT1, rated Ba2/BB, at 5.875% on the back of a book that peaked at over EUR5bn and stood at some EUR3bn at re-offer, after pricing was tightened from IPTs of the 6.375% area and guidance of the 6% area. One banker put the new issue premium at 37.5bp.

BBVA’s trade came a week after Bankia had on 10 September illustrated the positive post-summer conditions by issuing a EUR500m no-grow perpetual non-call five AT1 at 6.375% following IPTs of the high 6% area and guidance of 6.5%, plus or minus 12.5bp. The deal, rated BB- by S&P, had a EUR2.8bn book at re-offer after attracting some 220 orders.

And in the wake of BBVA’s success, compatriot Abanca sold a sub-benchmark, EUR250m perpetual non-call five AT1 rated B by Fitch at 7%, following IPTs of the mid to high 7% area. At the time of writing, that transaction, on 24 September, looked like potentially the last AT1 in euros of 2018.

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