ABN AMRO deal seen prompting more Yankee FIG offerings

The stunning change of mood among US investors regarding European banks was evident this week when ABN AMRO priced a US$1.5bn five-year Yankee bond on a launch day that was one of the weakest in a month.

The offering is the first by a single A rated European bank since the summer of 2011, when the US market shut its doors to anything remotely connected to the eurozone sovereign debt crisis.

Although Rabobank was the official icebreaker with a five-year deal on January 11, as a triple-A credit, it is hardly representative of the majority of European bank borrowers.

Wall Street, as anxious for the underwriting revenue as the European banks are for the dollars, is heralding the ABN deal as the green light for more national champions to make the journey to the Yankee market.

“This was an important trade for the market,” said Tom Criqui, managing director and head of FIG syndicate at Deutsche Bank in New York. “To take out that type of size was commendable and to get the performance in the secondary market that they did really bodes well for subsequent issuance (from other high quality European banks) in the US market.”

Eye-popping performance

The offering was priced at 355bp over Treasuries, which was 10bp tighter than initial price thoughts, representing a respectable 27bp new issue concession.

Best of all was its eye-popping performance in the after market, snapping in 27bp by Wednesday to trade at 328bp over Treasuries.

“If demand technicals remain intact, you will see a bid [for European bank bonds],” said Meghan Graper, a director on Barclays Capital’s investment grade syndicate desk in New York.

“Financial institutions out of Europe have the prospect of being a very significant component of US dollar business in 2012”

“And I would not be surprised to see issuance pick up in the back half of February when a number of issuers come out of their earnings blackout period.”

Hopes are for three to five more European bank deals in February. Admittedly, they’re sure to be the cream of the crop out of countries like Germany, Switzerland, the Nordic region, the Netherlands and the UK, but if they perform there’s no reason why top Italian and Spanish names couldn’t give it a go.

The ABN deal’s near perfect execution, by underwriters Barclays, BNP Paribas, JP Morgan, Morgan Stanley and UBS, brought an enormous sigh of relief from the underwriting community which is bracing for a smaller volume of new issues this year than last.

“The fact of the matter is financial institutions are typically anywhere between 60%-70% of new issue volumes in a year, and non-US borrowers over the past few years have been 35%-40% of total volume so these are meaningful numbers,” said the DCM head at one of the biggest bond houses on Wall Street.

“Financial institutions out of Europe have the prospect of being a very significant component of US dollar business in 2012” he said. “But we need a lot of stuff to go well. We need other markets to be constrained and we need US dollar execution to represent on a consistent basis the best alternative for these borrowers, and no-one is sure that we will have all that this year.”

Change of heart

The reason for the change of heart among investors has clearly been the ECB’s guarantee of liquidity to European banks.

“We liked this deal because it offered name diversification,” said Ashish Shah, co-head of global credit investments at AllianceBernstein.

Like the vast majority of US investors, Shah avoided European bank bonds in the second half of 2011, with only a few sparse purchases to top up an underweight position.

Since the beginning of this year, however, European bank spreads have tightened in 50bp-100bp in dollars.

“I think that the risk switch flipped after the ECB’s LTRO (Long Term Refinancing Operation), for sure,” said Shah.
The marketing effort and deal execution by ABN and its underwriters also had a lot to do with the deal’s success.

“It’s really hats off to ABN and its management and underwriters,” said one US portfolio manager of US pension funds, which did not buy the bonds. “They built a good book of real money accounts and I expect the dealers built a short in the deal to help performance in the after market.”

ABN roadshowed extensively to reach European, US and Asian accounts. It was anxious to distance itself from the sovereign debt crisis by explaining its transformation from a private bank with sprawling investment banking businesses internationally to a government-owned one with relatively little exposure to peripheral sovereign debt and focused on a domestic retail business in the Netherlands.

The bank’s marketing efforts paid off handsomely with US$300m of reverse enquiry orders out of Asia, believed to be one of the chief reasons why it decided to bite the bullet and issue the deal on one of the weakest days in weeks.

ABN went out on Monday with a deal of around US$1bn, with initial price thoughts around 365bp over Treasuries, or about 334.5bp over London Interbank Offer Rate, or Libor.

The last ABN AMRO trade in dollars was a three year in January 2011 — the 3.00% 2014s. This bond was quoted 310bp bid, 290bp offered over the two year US Treasury.

Once adjusted for the difference in yield between the two maturities and on the Treasury curve, the 2014s would be around T+335bp-340bp, which would mean ABN paid about a 15bp-20bp new issue concession on its new five year.

But the 2014s are so illiquid that the other Dutch bank, ING, was used as the best comparable, and the ABN deal looked 27bp cheap to its yield curve.

“We don’t think it offered a ton of concession from secondaries, but we do think that it adds to diversity, because it’s a name that hasn’t been out there in a while”

Another deal investors looked at outside of the Benelux region was Royal Bank of Scotland, also government owned but lower rated than ABN.

ABN’s initial thoughts of 365bp started flat to the RBS (A2/A) 4.375% 2016s which were quoted 355bp/345bp. ABN ended up pricing about 10bp tighter.

Lloyds was another UK comp mentioned. Its (A1/A) 4.875% 2016s were quoted at 360bp/350bp. The new issue concession to its 365bp initial price thoughts helped attract an order book of US$3.5bn. Underwriters brought out guidance at 360bp and eventually tightened it a further 5bp to the 355bp spread at pricing. The US$1.5bn deal has a coupon of 4.25% and was priced at a dollar value of 99.902, to yield 4.272%.

The 27bp pickup to ING wasn’t considered cheap to investors, especially when only a few weeks ago Rabobank had offered a 30bp-50bp new issue concession on its US$3.375bn five-year deal.

“We don’t think it offered a ton of concession from secondaries, but we do think that it adds to diversity, because it’s a name that hasn’t been out there in a while,” said Shah.

It did offer a good pickup to a wave of US bank deals that preceded it, which came with new issue concessions of between negative 2bp and +14bp.

Bank of America Merrill Lynch (Baa1/A-) priced 5.70s of 1/24/22 at T+378bp on Jan 19 for a negative 2bp new issue concession.

Citigroup (A3/A-) priced the 5.875s of 1/30/42 at T+297bp on Jan 19 — a concession of 7bp-12bp (with large trace prints today ranging from 272/268).

Goldman Sachs (A1/A-) priced 5.75s of January 24, 2022 at T+380bp on January 19 — a concession of 9bp-14bp. GS was the most active bond on Tradeweb for a good chunk of the day, with large trace prints at 353/343.

Bankers are hoping the ABN deal’s stellar performance in the aftermarket will further erode the new issue concession, because when comparing like for like, coming to the US dollar market was about 25bp more expensive for ABN than had it issued a new euro-denominated deal.

A number of senior bankers said that 25bp extra cost was even after taking into account the five-year swap spread of 28bp if ABN converted the offering into euros, as well as any new issue concession it would have paid on a new euro deal.

Magic silver bullet

ABN could justify the cost because it had certain dollar assets it wanted to fund in dollars. And the price was distinctly more attractive than the 70bp difference between dollar and euro issuance.

Whatever the cost, underwriters will be arguing strongly that it clearly pays for all European banks to prove their credit strength by regaining access to the US market, and to do so before the next inevitable bout of eurozone volatility.

Not every US investor is of the view that the ECB is the magic silver bullet.

“I think the LTRO is a very powerful device to eliminate jump-to-default risk, but you are not solving the capital shortfalls at many European banks, or their need to divest assets. It basically just provides a steady drip of vitamins in the hope that things will get better,” said David Knutson, senior analyst at Legal & General Investment Management America.

“I think US banks offer better risk-adjusted returns than Europe bank credit. You’ve already seen US banks build up their capital and liquidity positions and divest assets, while the European banks haven’t gone through that yet.”