Unbalanced, undersupplied market allows issuers to go from blackouts to blow-outs

The primary market’s strength shows no signs of easing, allowing banks to comfortably achieve size and price across euros and US dollars, as evinced by ballooning order books and absence of new issue concessions for the latest financial institutions issuance. Neil Day reports, with insights from Crédit Agricole CIB’s Europe and Americas DCM, trading, solutions and syndicate teams.

You can download a pdf version of this article in the full BIHC Briefing alongside further coverage.

February financials supply picked up where January left off this week, as banks approaching an undersupplied market encountered unsatisfied demand from investors finding enough reasons to buy, even if valuations remain stretched on some metrics.

Euro financials issuance (including secured) is down around 13% on the corresponding periods of 2023 and 2024. The decline would be more dramatic were it not for a 58% increase in senior non-preferred supply, with other asset classes experiencing falls ranging from 18% in senior preferred to 64% in euro AT1.

“Normally, when investors tell you they are disappointed, it means that performance was not there, but currently they are just disappointed because the supply was not there,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “The volumes that were anticipated have not materialised — and not only in financials, but also in corporates and SSAs.

“So all in all, they are simply starved of assets.”

As evidence of this, when senior euro issuance from European national champions returned in force yesterday (Thursday) after a quieter first half to the week, the €6.25bn of supply across the unsecured space was eagerly taken down.

“Supply had been slow given the US tech headlines, tariff talk and blackout periods,” said Antonios Tsiantas, FIG syndicate at Crédit Agricole CIB, “but with renewed macro tailwinds, the rally in rates and pent-up demand, yesterday’s trades were nothing short of blow-outs. There was minimal price sensitivity as books remained sticky throughout the last pricing iteration in most instances, while the outcomes were stellar, with zero to negative NIPs for all issuers.”

Svenska Handelsbanken raised €1.25bn with a senior preferred issue split into €750m three year floating and €500m fixed rate tranches that attracted more than €4.1bn of orders during bookbuilding, with pricing tightened from the 65bp area and 90bp-95bp, respectively, to as tight as 42bp and 68bp, a couple of basis points inside fair value in both formats.

Banco Santander extended out to 10 years for a €1.25bn senior non-preferred benchmark and attracted over €5.4bn of peak demand, allowing for tightening from the 150bp area to 120bp, flat to fair value and a new tight for the issuer, with negligible attrition.

“Some people have been sceptical about duration,” said Hoarau at Crédit Agricole CIB (pictured), “but Santander’s transaction demonstrates that there is no resistance towards duration in this market — if we have not seen many long dated deals, it is just because issuers were not ready to pay the extra basis points to print 10 years or longer.”

Deutsche Bank built the biggest book of the day, some €8.7bn for a €1bn six year non-call five senior preferred deal, with a starting level of the 160bp area proving eye-catching and the pricing being tightened 35bp to a re-offer of 125bp, again, flat to fair value.

UBS Group, meanwhile, raised €2.7bn in a two-tranche HoldCo trade in a follow-up to a $3bn dual-tranche US dollar Additional Tier 1 transaction on Wednesday. The Swiss bank attracted a whopping aggregate $22bn of demand for the $1.5bn perpetual non-call 5.5 and $1.5bn perpetual non-call 10 year tranches, with the pricing of each tightened some 75bp from IPTs and landing around 7bp inside fair value.

The strength of the US dollar FIG market overall has proven more than equal to its euro counterpart, with financials supply to this week up 9% on 2024, at $163bn, outpacing corporate supply down 19% year-on-year. Yankee financials issuance is up even more sharply, up 22%, at $60bn, with the rise driven by banks.

“Taking that into account, it’s very pleasing to see the development of the market, with the supportiveness of US accounts for Yankee transactions continuing to drive the success of many of these deals,” said Daniel Kim, director, US syndicate, at Crédit Agricole CIB. “Transactions such as UBS and BBVA Mexico (see separate article) yesterday provide ample evidence that investors remain very comfortable with bank capital instruments.

“The new administration here in the US is making it easier for banks to perform, with potentially less regulation,” he added, “and at the same time, most importantly, the credit story for banks individually and as a whole has been very positive, with earnings coming out very strong across the different facets of the industry. All that is certainly lending strength to the sector and driving the outperformance of banks within the financial space and versus corporates.”

While valuations have been considered toppish in many quarters for some time, there is little evidence that they are vulnerable, with varied factors supporting prevailing levels on top of banks’ creditworthiness.

“Recent conversations with real money investors confirms the main investment pattern is intact,” said Hoarau at Crédit Agricole CIB. “They are looking for alpha in higher beta instruments in an environment where assets are very expensive, net supply is negative, and liquidity abundant.

“Buyside accounts continue to dislike spreads, but to like the yield, despite the outright drop in rates: it is all about putting excess cash to work while optimising the carry. We live in an environment supported by rock solid technicals, where resilience to negative headline news is elevated.”

William Rabicano, director, credit trading at Crédit Agricole CIB (pictured), cited the market’s cool in the face of equity panic last week as evidence of this.

“The most telling day for me was Monday of last week (27 January) when the Nasdaq was down some 3% and we barely saw a seller of risk,” he said, “and as macro attempted to reverse, spreads were very quickly remarked tighter as people scrambled to cover shorts. And I could easily count on one hand the number of days we’ve gone home wider than where we started a day.

“Even at these valuations where you might expect buying to stutter and stall,” he added, “you can’t buy any bonds you want to and covering shorts is extremely difficult. And the need to finance buying of new deals by selling secondary paper has been non-existent.”

A continued pick-up in primary market supply is anticipated on the back of the strong technicals and as more banks emerge from blackouts, with few clouds on the horizon that could undermine the benign conditions.

The German elections on 23 February and S&P review of France’s rating are flagged by Neel Shah, financial credit analyst at Crédit Agricole CIB, but not deemed likely to cause any problems for issuers continuing to achieve strong results in the near term.

“It’s worth noting,” he added, “that French risk has been the clear outperformer at the start of the year, with investors much more confident in adding risk in the French space, where there has been only modest issuance. Any headline risk around the country on the political side has reduced quite sharply and is expected to remain subdued until mid-March.”

The strong technicals and momentum evident in primary and secondary dynamics are not, however, blinding market participants to the risk that the current scenario holds, according to Rabicano.

“It may get to the point where valuations are stretched and something in the macro market does crack,” he said, “and if that happens, we are susceptible to reacting quite negatively, quite quickly. So there certainly is a small note of caution out there, with people concerned about getting caught long at the tights.

“But at the same time, everyone can’t really look past the technicals.”

Indeed, the market could be on track to soar further, according to Hoarau.

“2025 has started nicely in FIG and there is a solid conviction that we are going to explore new pricing paradigms,” he said. “Southern European names will continue to surprise to the upside, the SP-SNP spread could compress further from an already small differential, and we could well see some first class names trading closer to the 100bp mark in Tier 2 soon.

“In AT1, the question is, when do we reach the 300 reset mark in euro primary?”