European banks stage US CP comeback

European banks have regained access to the commercial paper market in the US, with even Spanish and Italian banks getting overnight funding in rare instances.

Foreign banks and domestic financials with foreign parents – the majority of which are European banks – issued US$27.4bn of CP in January, according to Fed data, bringing their total US dollar CP outstandings at the end of that month to US$293bn.

While hardly the heady days of the first half of 2011, when foreign financial CP hit a peak of US$440bn in May, it is a major turnround from much of the second half of last year, when even some of the best European names struggled to secure even overnight funding.

“With the turn of the new year there has been a significant increase in lending to banks from certain jurisdictions within Europe,” said Chris Conetta, global head of CP trading at Barclays Capital.

“Money market fund investors have clearly broadened the number of European banks they are now willing to lend to, while also lengthening the tenor of their lending to other European banks they had remained comfortable with during the recent period of market volatility,” he added.

The biggest change has been in the attitude toward the French banks, which were shunned en masse by the US money market community at the peak of the eurozone sovereign debt crisis last year.

Generally, the strongest French banks can now raise 28-day US CP, and sometimes out to three months, from just overnight funding access in December.

“Money market fund investors have clearly broadened the number of European banks they are now willing to lend to”

UK banks have more traction and are generally able to get out to three-month maturities and in some cases six-months, while Scandinavian, German, Netherlands and Swiss banks can access six-month paper now.

Spanish and Italian bank access, however, has still not returned. “The money market funds are generally not ready for those names,” said one strategist.

Even so, some bankers claim that the best Spanish banks have placed tiny amounts of short-term securities with seven-day puts and on rare occasions some Italian banks have received overnight funding.

Asset-backed commercial paper conduits sponsored by European banks are also making a comeback.

Positive momentum

“We have seen some positive momentum for liquidity in the European ABCP sponsored programmes,” said Rob Little, head of global short-term fixed-income origination at Bank of America Merrill Lynch.

The ECB’s three-year long-term refinancing operation for European banks is behind the revival. “European banks’ access to liquidity was what most people were concerned about, and the fact that this has been fixed [by the ECB liquidity provisions] has been a huge positive for market participants,” said Deborah Cunningham, chief investment officer at Federated Investors, which has US$285bn of money market assets under management.

There is also the matter of a substantial decline not only in the yield on Treasuries and agencies, but the actual amount the US government is issuing at the short end of the curve. US banks have also severely cut back on their issuance short-term securities.

Top French banks are paying about 25bp for one-month paper and around 35bp–40bp for three-month CP, down from 40bp and 70bp at the beginning of the year, according to one observer, but compared with the 7bp JP Morgan pays on one-month CP and mid-teens for three months. UK banks pay about the same as France’s top banks.