Issuers hit receptive market as fears recede but latest episode prompts pragmatism

Ongoing technical supports ensured that the few financial institutions venturing into the primary market this week were rewarded with successful outcomes, but while recent credit events have been digested, tight valuations and year-end nearing could see issuers adopt more pragmatic approaches in the face of lingering unease.

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

Blackouts contributed to subdued supply in euros this week, with only €6.5bn of unsecured benchmarks from seven banks hitting the primary market, although it proved receptive even after a string of political — domestic and international — developments, and question marks over credit quality, particularly in the US.

“In spite of the slightly higher volatility we have seen, I continue to be impressed by how resilient the market is,” said André Bonnal, FIG syndicate at Crédit Agricole CIB. “The reason is the same: the liquidity situation, especially when combined with the carry that investors can enjoy at the moment in credit and specifically financials — from an all-in yield perspective, it’s still pretty much on a par with where we were in Q4 2024, despite the spread environment being tighter.

“So we still have a very solid market. It may not be as exuberant as it was in September or earlier in October — it’s maybe a seven-and-a-half or eight out of 10 market now, if I can put it like that, whereas in September — after a record month of supply in August — it was probably as close to a 10 out of 10 market as you’re going to get”

Translating this into new issue premiums, this equates to around 2bp-5bp rather than the zero NIP market of a month ago.

“And with spreads remaining pretty near year lows,” added Bonnal, “it’s also a market where investors continue to be happy to go longer on duration, or go down the capital structure for names they like.

“We continue to see spread compression — across regions and across the capital structure — and compression on the credit curve.”

Such trends were evident in the success of new issues for Greece’s Alpha Bank and Dutch insurer Achmea this week (see below and separate Alpha Bank article for more).

“It’s quite telling that you can have a couple of days, like last Thursday-Friday, when the market is quite shaky and seniors are, say, 4bp-5bp wider,” added Bonnal, “and then the next couple of sessions we have a short squeeze, as any widening is seen as an opportunity to buy by investors.”

However, recent headlines and volatility remain prominent in market participants’ thoughts.

“We have a bit of a nervous market at this point,” he said. “We have had a higher volatility environment over the past couple of weeks and have seen the first signs of cracks on the credit market.

“So investors have been asking themselves if maybe they are missing something.”

Connor Prochnow, US debt syndicate, Crédit Agricole CIB, echoed this.

“Outside of the French political environment, which has limited read-across over here, there hadn’t really been any external factors being a huge talking point in our market,” he said, “but now we’re dealing with two.

“One is the government shutdown, which is now in day 24. Frankly, we don’t see any light at the end of the tunnel and I, personally, wouldn’t be surprised if we get into November and are still shut down. And the impact that is having on economic data is notable.”

In the latest impact from the shutdown, the White House on Friday said that it will lead to inflation data probably not being released next month. While this should not directly affect the coming week’s FOMC decision — a 25bp rate cut is deemed most likely — it could present problems further down the line.

“It was pretty evident that at the September meeting the committee is still mixed in terms of its perception of the economy and the fact that there are mixed signals on both sides of the dual mandate,” said Prochnow. “So that could make things a little bit tricky as we get into year-end.”

The second external factor is the return of credit problems among US banks, resulting from headline names such as First Brands and Tricolor. JP Morgan Chase CEO Jamie Dimon’s comment last week that “when you see one cockroach, there are probably more” fanned fears around private credit, although the debate has since become more nuanced and balanced.

“There is now a broader discussion around credit quality and the financial system as a whole,” said Prochnow (pictured below). “How much is the system exposed if credit leaks start to occur?

“Those two external factors have been more of a talking point in an environment where we haven’t had a tonne of supply to occupy us,” he added.

Indeed, as financial stocks have been recovering and earnings proving reassuring, the primary market in the US has shown resilience, particularly when it comes to banks. In the wake of post-earnings issuance from the likes of JP Morgan, Goldman Sachs and Morgan Stanley, this week saw issuance from second tier names, including American Express, TruWest and State Street.

“The fact that we saw significant pressure in regional banks on Thursday of last week (16 October) and then on Monday we can see these institutions doing benchmark deals with very solid execution is a pretty strong statement,” said Prochnow.

Banks have contributed 60% of all investment grade supply this month, $32.6bn out of $53.5bn, and even though overall IG supply is down some 44% on October last year, year-to-date issuance is roughly flat, noted Prochnow, with so much funding having already been done.

Insurers hit the spot

In euros, with most European banks yet to report earnings, financials supply was limited this week — the two largest trades were for north American names, Bank of Montreal raising €1bn and Bank of America €2.75bn of bail-in debt on Tuesday and Wednesday, respectively.

The most significant subordinated debt came not from the banking sector but insurer Achmea, on Monday. Its €300m no-grow perpetual non-call 10.75 Restricted Tier 1, expected ratings BB+/BBB (S&P/Fitch), was priced at 5.75% on the back of more than €3.4bn of demand, pre-reconciliation, following initial price thoughts of the 6.25% area, with the final book some €3.6bn.

“Investors want subordinated trades, they want duration, and insurance is perfect for that as it’s exactly what they offer,” said Bonnal, “so it’s no surprise that we are seeing more and that so many are going so well.”

Achmea’s RT1 was just the latest in a spate of insurance issuance, with French companies in particular having hit the market last week: Axa sold a €1.5bn dual-tranche trade, equally split between RT1 and Tier 2, on the Monday (13 October), with La Mondiale issuing €500m of Tier 2 the same day, and BPCE Assurances raising €280m in RT1 format and €400m in Tier 2 on the Thursday.

“If you look at Axa’s result, the reset is substantially lower than where they printed essentially the same deal with us in May,” noted Bonnal (pictured below), “so again we see the dynamic is very strong. Indeed, the dual-tranche trade was not necessarily planned for this year; they brought it forward because conditions have still been looking so good — especially when put in the context of the French situation.

“And it was interesting to see another French group, BPCE, externalising what would normally be internal debt between the insurance part and the bank parent.”

However, insurance supply is likely to be substantially lower in the coming two years, according to Bonnal, with the refinancing of grandfathered Tier 1 debt that has been driving the issuance nearing an end — Achmea’s RT1 was launched in conjunction with a tender offer for two outstanding subordinated issues.

Glass half full?

The largest European unsecured financials trade of the week was a 10 year green senior non-preferred benchmark for Svenska Handelsbanken on Thursday, a day after it announced Q3 results. Three hours after IPTs of mid-swaps plus 110bp-115bp were announced, pricing was fixed at plus 85bp for a €750m size on the back of books above €2.1bn, pre-reconciliation, with the final order book falling to €1.3bn.

Although the issuer faced order attrition of 38%, it came away with the tightest 10 year SNP pricing of the year in the pre-funding exercise on the back of a new issue premium put at just 2bp-3bp.

“That kind of spread is extremely tight on an historical basis,” said Bonnal. “Yes, you’re probably going to have faster hands looking for a higher NIP dropping out when you get to those levels, but it was impressive that they printed inside Rabobank’s 10 year green SNP from a few weeks ago at 87bp — we’re not at the sub-70bp spreads we saw in 2020 when rates were negative, but we’re not far away.

“To me, it demonstrates the mindset of issuers,” he added. “Handelsbanken is as tight as it comes, best in class, doesn’t have a lot to do in terms of funding programme, but chose to do this pre-financing. They see the value of locking in that kind of re-offer spread for longer tenors, and I wouldn’t be surprised if we continue to see that kind of pre-funding activity as banks exit blackouts in the next couple of weeks.”

Other banks are likely to see the glass as half full rather than half empty and adopt a similar approach, according to Bonnal.

“The volatility we’ve seen has been a bit of a wake-up call. When issuers see spreads going 5bp wider in a day, they are asking themselves if they are taking a risk by waiting for spreads to tighten 10bp.

“So while the consensus is still for spreads to tighten and it’s hard to see just what exogenous shock could substantially derail the market, issuers are getting a bit more pragmatic about the levels they can achieve in the current market.”