IFR DCM Special Report 2014
Fashion can be a cruel mistress, especially if you’re the only person to turn up at the party with platform sneakers, a tracksuit with “Juicy” scrawled across the derriere, and a green feather boa. Banks are experiencing their own fashion faux pas right now and working hard to maintain their appeal.
Fashion can be a cruel mistress, especially if you’re the only person to turn up at the party with platform sneakers, a tracksuit with “Juicy” scrawled across the derriere, and a green feather boa.
Banks are experiencing their own fashion faux pas right now and working hard to maintain their appeal.
Disintermediation means borrowers are no longer infatuated with banks’ 1990s styles and attitudes, and can even make them jump when it comes to winning bond mandates. The regulatory squeeze is making derivatives more expensive for corporates and public-sector borrowers, but they don’t want to pay, so banks must take the hit and offer hedging to get picked.
It is worth going the extra mile to keep borrowers happy and distract them from the handsomely dressed institutions that have caught their eye. Smaller and unrated borrowers are looking to cash-rich non-bank institutions for private placements, excluding banks entirely. The numbers are presently small, but growing fast and compound the Basel III pain that already makes lending to SMEs difficult.
But there are reasons to be cheerful – and not least because there are doubts about the sustainability of the surge in primary market debt issuance in Europe.
Those old threads suddenly look more appealing in the context of sustainability and climate change. In tune with their issuers – sometimes the most unlikely of hippies – banks are enjoying the rise in Green bonds.
Meanwhile, the high-yield syndicate managers are flashing their haute couture, financed by a stellar summer of record post-crisis refinancing and acquisition-driven financing, and the euro embraces an ever-growing list of foreign issuers.
Of course, there is also the option of going back to those that don’t think you are unfashionable at all – infrastructure projects – and now look surprisingly fetching in terms of loan margins.
Even though issuance has jumped in bonds in euros against a decline in the dollar market, the place is full of gatecrashers from Asia, the Middle East, Russia and Latin America taking advantage of the hospitality. Emerging and frontier market issuers have been filling their glasses with abundant liquidity, although the more sober observers fear that they will be unable to hold their drink and risk a nasty debt hangover.
Banks will have to fight their way through the scramble on the dance floor getting down to the latest Basel Blues, a tricky capital-raising number with lots of complex steps choreographed in the aftermath of the debt crisis. They need not worry too much about feeling like an outsider: it’s no longer a mainly European party.
Perhaps it’s time for bankers to rethink their dress sense.