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Friday, 15 December 2017

Confined market access

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Since the collapse of Lehman Brothers in September 2008, almost all European supply in financials public market has been limited to the senior, unsecured market. Concerted government action in response to the Lehman-induced panic gave rise to the government-guaranteed senior debt market, the meteoric rise of which has filled the void created by the moribund subordinated market to a large extent. Malini Menon reports.

The birth of the government-guaranteed senior debt market in October 2008 was intended to rejuvenate investor confidence and keep the supply engine humming in financials. Its rise to prominence has been steep. In the euro market, Austria became the tenth jurisdiction to utilise the government-guaranteed senior funding route, an asset class which was inaugurated by the UK’s Barclays Bank.

Erste Bank opened the guaranteed senior market in Austria in mid-January, raising €1.5bn in two-year maturity. The Triple A rated, fixed-rate transaction was priced at mid-swaps plus 53bp, 2bp tighter than the initial guidance.

The second deal came a week later. Kommunalkredit Austria managed to price a similar trade (in terms of size and maturity) 3bp tighter at mid-swaps plus 50bp. Subsequent issuance from Raiffeisen Zentralbank - €1.5bn in five-year maturity - the first such maturity trade in the government-guaranteed bank senior transaction (besides SFEF, which uses an intermediary approach) - priced at mid-swaps plus 68bp, 2bp tighter than its initial guidance.

On the back of good secondary market performance of these bonds, Oesterreichische Volksbanken came with €1bn in three-year maturity, priced at mid-swaps plus 50bp in February, before Erste Bank came back for a second time, raising €1.5bn in five-year maturity.

However, it was not all one-way traffic. Since rating agency Moody's raised concerns on February 17 about Western European banks' commitment to their Eastern European subsidiaries, citing deteriorating local conditions, questions have been asked about governments’ ability to foot the bills of their banks.

Moody's noted that, from a creditor's point of view, the Austrian banking system was the most exposed among its CEE peers, with Eastern Europe accounting for nearly half of its global bank claims. The sovereign's five-year CDS subsequently gapped out, from 170bp on February 13 through to 215bp on February 17, to as high as 260bp on February 24th.

In the cash market, the outstanding €1bn OeVAG February 2012s were bid in the mid-50s (from their mid-swaps plus 50bp pricing level), while the five-year €1bn Erste Bank senior was bid at least 15bp wider in the low 80s, on February 27th. The Kommunalkredit Austria issue priced on February 27 for a three-year maturity, cleared at mid-swaps plus 85bp, in line with guidance, reflecting the new wider spreads.

Some respite came by eventually, when investor jitters about the sovereign were calmed by Fitch Ratings on March 4 when it affirmed the Republic's long-term foreign currency IDR at Triple A with a stable outlook. Austria's credit fundamentals were sufficiently strong to cover substantial losses on its banks' exposure to CEE without imperiling its Triple A status, said the rating agency.

Taking advantage of the stability triggered by the news, RZB chose that week to issue its second Austrian government-guaranteed offering, with a three year maturity. The €1.25bn deal at mid-swaps plus 85bp, offered a 60bp–65bp pick-up over the interpolated (January 2011s to July 2012s) government curve.

In quick succession, OeVAG too lined up its four-year maturity offering. It was the first such tenor issuance in the government-guaranteed senior debt market, in part chosen to suit the issuer's ALM considerations, but also signaling investor fatigue in three-year maturity. The borrower issued €1bn at mid-swaps plus 95bp in line with guidance.

With the two most recent guaranteed deals from the jurisdiction, €1bn from Kommunalkredit Austria and €1.25bn from RZB (both in the three-year maturity), having cleared at mid-swaps plus 85bp, the issuer deemed it appropriate to offer a 10bp pick-up to compensate for the new issue's one-year longer duration.

Compared to the Spanish and Irish GG market, Austrian deals have largely held value in the secondary market. But unlike its German counterpart, the Austrian borrowers face higher cost of funding despite their Triple A ratings. "The government guaranteed debt market has made a credit market out of sovereigns," said a FIG DCM banker.

More could be imminent. "The market will not necessarily improve in the coming weeks, so there is no merit in biding time," said one banker.

Most of the Austrian deals have enjoyed considerable domestic support and good sponsorship from Germany and the UK. Bank investors were the main buyers of these bonds, followed by asset managers and central banks and agencies.

However, it is feared that the level of oversubscription seen on the Kommunalkredit trade (circa €1.2bn for a €1bn print size) is perhaps an indication of cooling off of demand and the limited liquidity available for the jurisdiction.

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