Euro bank debt recovers strongly to reopen ahead of Easter, as rate outlook improves

The resumption of euro unsecured bank issuance today (Tuesday) comes on the back of a rapid recovery from post-SVB and Credit Suisse lows, with even AT1s having rebounded strongly. The ball is now in the court of central banks, whose balancing of inflation and financial stability missions could shape market dynamics. Neil Day reports, with insights from Crédit Agricole CIB syndicate and DCM Solutions.

BNP Paribas reopened unsecured bank issuance in euros today with a €1bn eight year non-call seven senior non-preferred (SNP) green bond, following a strong recovery in spreads, with an increasingly benign macroeconomic outlook combining with receding bank fears to spur activity.

The French bank’s new issue is the first euro bank supply outside covered bonds since 9 March, just before the failure of Silicon Valley Bank. The new issue came at the same time that Axa reopened the euro subordinated FIG market with a €1bn 20.25 non-call 10.25 Tier 2 blow-out this morning (see article below).

After going out with initial price thoughts of the mid-swaps plus 140bp area for the eight non-call seven SNP benchmark, BNP Paribas priced its new issue at 137bp on the back of a book of more than €1.85bn, with orders having earlier surpassed €2bn.

The pricing was arguably as much as 10bp-15bp inside the issuer’s conventional curve, although fair value based on its green secondaries was elsewhere seen at around 125bp, and hence 135bp for a new conventional issue, implying a new issue premium of a couple of basis points.

A successful reopening of the market had been anticipated early this week on the back of a dramatic improvement in sentiment.

“What we have seen in today’s market is a 180 degree turnaround in risk appetite compared to where we were 10 days ago,” said Vincent Hoarau, head of FI syndicate at Crédit Agricole CIB. “We had the feeling this morning that the cooling inflation figures and constructive rate outlook would be a strong factor for new bond issuance, and that is exactly what we saw today, particularly with Axa.

“In terms of quality and granularity, the book was exceptional and you can feel that investors don’t want to miss out. They know that the bulk of the rate hikes are behind us and don’t want to be in a position where they are chasing paper in the secondary market.”

Already last week, the iTraxx Crossover had recovered more than 125bp of ground from its 20 March peak, and André Bonnal, FI syndicate at Crédit Agricole CIB, noted that buyside momentum continued into the start of this week.

“The market has been on a very good tightening trend,” he said. “We have seen strong ETF flows pretty much buying indiscriminately on the lows, and even if these flows are small, this has helped bring pretty much everything tighter, especially with the lack of supply there’s been — we’ve had three weeks of nothing but covered bonds and one funding agreement-backed note.”

Candidates who could build on the reopening of unsecured issuance include those banks that have thus far this year been less active but are now keen not to fall behind in their funding, as well as second tier names who preferred to wait for national champions to restart supply.

“I expect such issuers will be prepared to pay the price for getting something done and also keen to take volume,” said Hoarau. “It’s clear from the past few weeks that the market can be quite volatile, if not shut completely.

“Had this been a normal week with four actionable days, we would have seen more follow-on issuance,” he added, “but the long Easter weekend presents something of an obstacle, and some issuers will be happy to wait until afterwards.”

Today’s reopening came after market participants could last week refocus on fundamentals after a fortnight of fire-fighting.

“It was the first, so to speak, quiet week,” said Hoarau. “The market turned back to the macroeconomic situation and inflation figures, while the absence of bad news fuelled a strong tone towards risk assets.”

The sentiment was reflected in two year US Treasury yields backing up to around 4.20% last week after they had fallen from above 5% to below 3.80% amid the fallout from the demises of Silicon Valley Bank and Credit Suisse.

Yield curves in the US and Europe meanwhile became less inverted, and macroeconomic data released last week affirmed dovish hopes.

“In the US, inflation numbers remain fairly elevated, but the trend of cooling inflation has definitely been confirmed by the latest data,” said Hoarau. “It’s certainly still too high for many Fed officials, but at least it’s going in the right direction and there is a consensus that the end of the tightening cycle is approaching.”

The PCE index fell to 5.0% in February, coming in slightly lower than expected in Friday’s release, while the previous month’s figure was revised downwards. The market is now pricing in 50:50 chances of either no increase or a 25bp hike at the next FOMC meeting on 3 May, and then a pause, with rate cuts anticipated by year-end.

Eurozone figures released on Friday painted a more complicated picture, with headline CPI falling from 8.5% to 6.9% in March, but core inflation — the European Central Bank’s main focus — accelerating from 7.4% in February to a historic high of 7.5%. The market is pricing in 75bp of rate hikes across May, June and July — possibly front-loaded — but a pause thereafter as the prevailing situation is considered.

“We’ve had some good numbers and some bad,” said Bonnal, “but clearly it still remains at elevated levels. That’s the inflation part of the story, but there is another force at play, namely financial stability.

“Will central banks have to take that into account in their overall monetary policy strategy? So the direction will obviously depend on forthcoming inflation numbers, but also the level of stress we may have in the financial system in the coming weeks and months.”

In spite of the encouraging developments, last week remained another blank week for unsecured and subordinated FIG supply in euros. In the meantime, covered bonds again demonstrated their resilience, as CIBC on the Monday (27 March) restarted euro FIG supply after two blank weeks with a successful €1.5bn four year trade at mid-swaps plus 33bp, kickstarting €9.25bn of supply via four deals in the asset class, and a further €3bn via three deals followed today.

“Covered bonds are playing a key role and will continue to do so,” said Hoarau. “We had close to €10bn of deals last week, with everything smoothly digested, strong oversubscription levels, and good granularity.

“NIPs have been fairly limited, in the context of the mid-single-digits, which is impressive given what has happened in the banking system in recent weeks,” he added. “Don’t forget that when we reopened after Covid, new issue concessions were in the high single-digits, if not 10bp, with spreads somewhere in the 40s for three to five years.”

Euro benchmark covered bond issuance of some €86bn for the first quarter is the second highest ever (after 2011), and overall euro-denominated FIG supply still remains well above the run-rate of recent years, at more than €190bn for the first three months of the year (see table over).

“That is despite three weeks of the primary market being starved of supply,” said Hoarau, “which illustrates just how heavily FIG borrowers have been front-loading activity. That reflects the normalisation of funding programmes as we exit QE and loose monetary policies.”

And in spite of the ongoing post mortem of Credit Suisse Additional Tier 1, the most deeply subordinated bank asset class has recovered strongly from its lows, raising the prospect of an AT1 reopening sooner rather than later. Bottom-fishing from UK and French accounts amid a favourable rate environment supplemented by Asian interest has seen many AT1s trading back at par.

“The tone has recovered swiftly,” said Hoarau, “and it feels like primary market would be open for very strong names.

“Looking ahead, considering the strong capital metric, legal framework and support seen from regulators in Europe, we anticipate a constructive consolidation of the sector and a solid recovery.”

But while the market may be normalising, the lessons of the Credit Suisse write-down will not be completely forgotten in a hurry. Greater discrimination is expected among investors towards jurisdictions, credits and structures, while issuers’ attitudes towards calling or not calling AT1 will be critical.

“Some investors have left the asset class and will not come back, particularly if outright interest rates remain elevated,” said Hoarau.

“There are enough alternatives around with a high coupon but where capital is less subject to destruction.”