Dollar bank capital hits new highs as rates stabilise, overshadowing cautious euro mart

With rates markets having stabilised after a bout of uncertainty, the US credit market last week experienced renewed momentum, allowing an array of European banks to achieve stronger outcomes than available in a more hesitant euro market. Neil Day reports, with insights from Crédit Agricole CIB trading and syndicate in London and New York.

You can download a pdf of this and associated articles in our full briefing here.

European financial institutions experienced strong outcomes across the capital stack in dollars last week, as the US credit market went from strength to strength, overshadowing the euro FIG sector, where issuers had to account for heightened sensitivity among investors.

The exceptional conditions in the US were demonstrated by UBS Group on Tuesday achieving the lowest ever coupon on a dollar AT1 from a European issuer, 3.875% on its $750m (€615m) perpetual non-call five deal. Pricing was tightened from initial price thoughts (IPTs) of the 4.5%-4.625% area on the back of some $4.4bn of demand, with the final level flat to slightly through fair value.

Connor Prochnow, US debt syndicate, Crédit Agricole CIB, said the pricing represented a breakthrough that demonstrated the rude health of the sector.

“Four percent had been something of an unofficial floor for that market for some time,” he said, “so when you see them being able to print at 3.875%, that speaks to the pent-up demand for that segment of the capital stack.”

He noted that the potential for such successful issuance had been suggested by the recent performance of a $2bn dual-tranche AT1 issued by HSBC Holdings at the beginning of March. After struggling to perform amid the rates volatility that afflicted the market from mid-February onwards, the $1bn perpetual non-call five and perpetual non-call 10 tranches had now recovered to trade above par.

“Over the beginning of Q2, when the market was trying to adjust to the new rate dynamic and its uncertain trajectory, it was a little tough for capital deals to get done,” said Prochnow. “But now that we have settled into a comfortable trading range, and with the risk tone on the dollar side still very robust, that is allowing for deals on both the high quality side and for some of the higher beta names.”

Intesa Sanpaolo had on Monday opened dollar subordinated issuance for the week with a $1.5bn dual-tranche Tier 2 trade, its first in the dollar market since 2016. The Italian issuer launched $750m 11 non-call 10 and 21 non-call 20 tranches, and was able to tighten pricing from IPTs of the 300bp area and 305bp area over Treasuries, respectively, to 260bp and 275bp.

“They paid a healthy concession,” said Prochnow, “but traded meaningfully tighter, around 15bp-20bp, on the break, which is indicative of the state of the market.

“In this environment, where both rates and spread product are trending towards historical tights, anything like this which comes with a pick-up is going to attract investors’ attention and catch a strong bid.”

Deutsche Bank and UniCredit were similarly able to benefit from the trend last week. Deutsche achieved levels flat to marginally through fair value for $1bn three year senior preferred and $1.5bn 11 non-call 10 senior non-preferred tranches, tightening pricing from Treasuries plus 80bp-85bp and the 180bp area, respectively, to 60bp and 148bp on the back of a combined $13bn-plus of orders.

UniCredit attracted an aggregate $6bn-plus of orders to a $2bn dual-tranche senior non-preferred deal, split into $1bn six non-call five and 11 non-call 10 trades. Pricing was tightened from the Treasuries plus 145bp area to 120bp for the shorter tranche, and from the 180bp area to 155bp for the longer.

The Yankee issuance came despite the euro/dollar cross-currency basis swap being at its lowest level since 2015, with the outperformance of US credit markets more than compensating for that.

Euro NIPs edge higher

Indeed, dollar issuance far exceeded financial institutions activity in euros, which was more tentative last week, with a lack of hybrid issuance, save for a €200m (DKK1.5bn) perpetual non-call eight AT1 for Jyske Bank on Wednesday. Only four benchmark trades hit the market, three senior non-preferred and one senior preferred.

In spite of the easing of rates volatility, investors remain watchful for renewed inflation warnings, according to Vincent Hoarau, head of FI syndicate at CACIB, and with credit spreads at or near historic tights, this has pushed new issue premiums higher.

“A couple of weeks ago, before the latest NFP and CPI data, everything was coming bang on the curve,” he said, “but the dynamic has changed a little, and if you want to deliver a reasonable outcome you have to pay up a bit.”

This was borne out by senior non-preferred trades for ABN Amro and Banque Fédérative du Crédit Mutuel (BFCM) this week.

BFCM went out with IPTs of the 100bp over mid-swaps area for a €1.5bn seven and a half year SNP and was able to tighten pricing 23bp to 77bp on the back of an order book of some €2.4bn, ending with a new issue premium of around 3bp. ABN Amro paid a new issue premium of around 5bp after attracting around €1.6bn of demand to a €1bn 12 year SNP issue and tightening pricing from 100bp-105bp to 83bp.

“Even taking into account the size they were seeking, they came with quite generous levels, and delivered outstanding results in terms of subscription ratio and secondary market performance,” said Hoarau.

Landesbank Hessen-Thüringen (Helaba) was able to take a different tack when coming with a €500m eight year trade that was its first green bond and first senior non-preferred issue, with Hoarau at joint bookrunner CACIB highlighting the limited deal size and green nature of the deal as key to the outcome. Following initial guidance of 70bp-75bp, the German bank could tighten to 53bp on the back of some €970m of orders and achieve pricing around 2bp inside fair value.

“In line with the bank’s sustainability strategy, we want to position Helaba as a fully sustainable issuer across all funding instruments on the refinancing side, too,” said Helaba treasurer Dirk Mewesen. “Strong demand from investors for our green bond indicates that we are on the right track with our approach.”

A €500m 10 year senior preferred issue for KBC found the going tougher. Although the Belgian bank could tighten pricing from 80bp-85bp to 65bp on the back of a €800m book, the new issue widened 3bp-4bp in the secondary market.

Caution, but no fear

William Rabicano, director, credit trading, at CACIB, said that although investors are proving more selective and stricter on price, the resultant order books can nevertheless be higher quality.

“Books may be smaller than we’re used to, but one of the reasons is that you’re seeing less fast money because they’re not comfortable with how deals are breaking,” he said. “This means the final books are real and the bonds are in strong hands. That may be why most of this week’s deals have performed so well — we’ve seen very little selling and, if anything, there’s been top-up buying.

“There’s a bit more nervousness around AT1s, given how susceptible that sector is to large moves in rates, but even there we still see this buy-the-dip mentality.”

Neel Shah, financials credit analyst at CACIB, noted that investors’ concerns on rates and preference for shorter maturities have been reflected in issuance, with the longest AT1 benchmark in any currency since March being a non-call seven, for example, whereas most supply in the first two months of the year was focused on non-call 10 structures.

“There’s definitely more sensitivity among investors in terms of the duration risk they are taking,” he said, “and I expect more appetite for short duration in the primary market and also the secondary market.”

Hoarau expects the market to become increasingly focused on economic datapoints, with US rather than Eurozone numbers the more likely to cause any disruption, given the more advanced stage it is at in the recovery than Europe. However, he expects conditions to remain benign going into the summer break.

“No one feels the rush to issue now ahead of the June ECB or Fed meetings,” he said. “Everyone is pretty relaxed at the moment, with no concern whatsoever towards market evolution in the coming weeks or month.”

As this report was going to press this (Tuesday) morning, Belfius Bank entered the market with its inaugural green bond, a €500m no-grow six year senior non-preferred deal with IPTs of the mid-swaps plus 80bp area, with CACIB green structurer alongside Belfius and a joint bookrunner. MUFG was also in the market, with a six year non-call five euro benchmark HoldCo transaction at IPTs of 80bp-85bp.