On Tuesday the financial indices were making up lost ground with the iTraxx Senior Financials 2bp tighter at 64bp, and the Subordinated index 4bp tighter at 92bp.
“The market is better today but we’re not fully back to the races yet,” said one syndicate banker.
“The US started significantly down yesterday but recovered a bit but we are concerned about what’s happening in Hong Kong and the impact it might have.”
In the primary market today, Swedish Covered Bond Corporation (SCBC) attracted enough interest to easily secure a €1bn seven-year trade that is poised to price at mid-swaps plus 1bp.
The Swedish lender began testing investor interest at mid-swaps plus low single digits before revising guidance down to plus 2bp area as orders approached €1.5bn. Barclays, BoAML, Citigroup, Danske and RBS are leading the trade.
“We got a solid order book for this deal but we’re not seeing the kinds of inflated demand we see for bonds that will be bought by the ECB’s purchase programme,” said a syndicate banker.
“The fives/sevens curve and sevens/10s curve is flattening out so it’s very cheap for banks to extend their credit curves in this market.”
The banker estimated that there’s only about 5bp of spread difference between five and seven years for a credit like SCBC when only a few months ago there would have been 10bp.
In terms of fair value, one banker estimated at the final spread there is about 1bp of new issue premium.
Elsewhere, Germany’s HSH Nordbank highlighted the insatiable bid for eurozone covered bonds when it attracted over €1.5bn of orders from 70 accounts for a €500m seven-year trade.
Lead managers - Credit Agricole-CIB, Commerzbank, Deutsche Bank, HSH Nordbank and Nord/LB - began testing investor interest at mid-swaps plus low 10s and revised guidance down to plus 7-9bp before fixing the spread at plus 7bp.
“HSH isn’t the easiest underlying credit but when you have the ECB preparing to buy bonds, investors are starting to view banks out of Germany and the eurozone as zero risk,” said the banker.
HSH, long seen as vulnerable in the ECB’s review of German lenders because of its exposure to troubled shipping loans, warned in late August its capital buffers could mean the bank falls short in a European Central Bank (ECB) stress tests.
HSH’s Common Equity Tier 1 (CET1) ratio stood at 10% at the end of June, excluding the effect of a loss guarantee buffer provided by its state owners, worth 2.8%.
S&P deals blow to bank hybrid market
Standard & Poor’s dealt a well-expected blow to the bank hybrid market on Tuesday, taking action on nearly 1,200 hybrid capital instruments and 250 subordinated debt programmes.
The ratings agency is introducing new methodology in response to the tougher regulatory environment for Tier 1 and Tier 2.
“European regulators are adopting a tougher “bail-in” stance toward hybrid capital instruments,” said S&P in its research note.
“We believe that this increases the likelihood that European banks will be required to use hybrid capital instruments included in their regulatory capital base to absorb losses in the event of material stress.”
According to BNP Paribas research, today’s action will see 10 names’ bonds moving out to BB+ at S&P, but only Mediobanca and UniCredit will see their average rating moving from BBB- to BB+.
“Tier 2 CoCos are not affected as they already factored in the ‘mandatory contingent capital’ feature in their ratings,” they said.
S&P anticipates that banks will suspend coupons on deferrable instruments at an earlier stage under the Basel III/CRD IV framework.
“We have addressed this in our ratings on European bank Tier 1 hybrid instruments by lowering the ratings by an additional one or two notches than previously, in most cases, to reflect the heightened risk of nonpayment on Tier 1 capital instruments that are subject to these Basel III provisions,” S&P said.
On Tuesday, S&P indicated it will lower the issue credit ratings on 88% of reviewed hybrid capital instruments, with 68% cut by one notch and 20% by two notches. It also affirmed the ratings on 12%.
By instrument type, it downgraded 94% of legacy Tier 1 instruments by one or two notches (34% and 60%, respectively), 64% of Basel III-compliant, Additional Tier 1 instruments by one or two notches (57% and 7%, respectively), and 86% of non-deferrable subordinated debt instruments by one notch.
The ratings announcements follow the publication of S&P’s revised bank hybrid capital criteria in mid-September.
S&P is already planning its next step in the process that will see it publish a list of instruments affected by today’s ratings actions within the next few days.
Mann at risk at JP Morgan
Jason Mann, a financial institutions group (FIG) syndicate official at JP Morgan in London, could be set to leave the US bank after being put at risk, according to a source close to the situation.
Mann’s potential departure, after more than three years of service, will deepen the void in the bank’s financials team that has already lost three long-standing dept capital markets FIG bankers in the past few months, according to sources.
In July, JP Morgan put at risk Veenay Chheda, an executive director in the hybrid structuring team, Ian Haywood, a UK and Ireland FIG DCM coverage banker, and Lily Brown, a French FIG DCM banker.
“You just have to look at the deals JP Morgan has missed these days to see that clients are not particularly happy with the way they are running the business,” said a syndicate banker.
Over the course of this year, JP Morgan has dropped out of the top 10 financial bond houses for euro deals, having been at number nine in January of this year.
Chambers joins Credit Agricole’s FIG syndicate desk
Robert Chambers has joined Credit Agricole as an assistant director on the syndicate desk covering financial institutions.
This is a newly-created position on the London-based financial institutions group (FIG) syndicate desk, according to a bank spokesperson. The desk has grown from two people to three as a result.
Chambers reports to Vincent Hoarau, head of FIG syndicate, and works alongside Viet Le, who joined the FIG syndicate team in August 2012.
Before joining Credit Agricole, Chambers was a senior analyst in VTB Capital’s fixed income syndicate team. (Reporting by IFR’s Michael Turner)
S&P lowers 61 Asian bank hybrid capital instruments
Standard & Poor’s lowered ratings by one notch on 61 Asia-Pacific (ex-Japan) bank hybrid capital instruments today after changes in its rating methodology towards such instruments.
The rating agency now deducts an additional notch for Basel III Tier 1 capital instruments for Asia-Pacific banks because it believes that there is greater potential for issuers to miss coupon payments when they need to maintain regulatory capital conservation buffers under Basel III.
It will also deduct this additional notch for coupon nonpayment for legacy Basel II Tier 1 instruments in most Asia-Pacific jurisdictions, except where it does not believe such legacy instruments are subject to Basel III or equivalent rules.
After factoring in the additional notch, the agency now rates Basel III Additional Tier 1 instruments four notches below the issuing bank’s standalone rating. One notch is to compensate for subordination, two for coupon deferral and one more for write-down or equity conversion risk.
Prior to the changes in its rating methodology, S&P had only assigned one notch for coupon deferral risk. The new methodology incorporates higher coupon nonpayment risk under the Basel III regime as, compared to Basel II, Basel III requires additional capital buffers including capital conservation buffer, counter cyclical buffer and special capital buffer for systemically important banks both domestically and globally.
For Tier 2 instruments under Basel III rules, S&P will generally keep applying a two-notch cut to compensate for subordination risk and loss-absorption risk, unless the T2 instruments also carry a coupon deferral feature.
The 61 hybrid capital instruments affected account for about 50% of outstanding bank capital instruments in Asia. The rate is lower than the US and Europe, where around 82% and 88% of hybrid capital instruments have been lowered, respectively. This is mainly because the US and Europe apply Basel III rules in an all-encompassing manner to their bank capital, whereas some Asian countries stopped short of applying Basel III rules to the legacy bank capital. (Reporting by IFR’s Lianting Tu)
Results from Monday’s deals
Issued: DNB Boligkreditt €1.25bn Oct 2017 0.375% at MS-3bp
Leads: BNPP, CMZ, CS, UNI
Book size: €1.8bn, over 90 accounts
Distribution: Germany 46%, UK & Ireland 17%, Nordics 9%, France 9%, Benelux 6%, Switzerland 6%, Asia 3% and others 4%.
Banks and financial institutions took 53%, asset managers 26%, central banks and official institutions 17% and pension funds and insurance companies 4%.
New issue premium: 1bp
Secondary performance: 1bp tighter on Tuesday morning
Issued: Suncorp Metway £250m Oct 2017 3mL+60bp
Leads: NAB, RBS and UBS
Book size: Covered, 20 investors involved
Distribution: UK took 80%, Asia Pacific 17% and others 3%.
Banks took 48%, asset managers 42% and insurance companies 10%.
FSB proposes cross-border resolution plan
The Financial Stability Board has begun a public consultation on proposals intended to enhance the cross-border recognition of bank resolution measures including bail-in and temporary stays on swaps termination rights.
As part global efforts to end “too big to fail”, key derivatives dealers have agreed to sign up to a new ISDA protocol that would apply temporary stays on early termination rights for bi-laterally negotiated over-the-counter swaps in the event of a counterparty entering bankruptcy.
“In coordination with global policy-makers, ISDA has been working to develop a contractual solution that would provide for a temporary stay of the early termination provisions within derivatives contracts in the event a major global bank is subject to resolution action by its regulators,” noted the derivatives industry body in a statement.
“We expect that a number of such banks will adopt the stay within new and existing contracts via a protocol this year. That protocol should be finalised within the next few weeks.”
The new regime is intended to strip derivatives users the immunity they have historically enjoyed from any automatic stay on liabilities as a counterparty enters bankruptcy. It is a situation that has effectively afforded swaps users with seniority over other creditors in a bankruptcy situation, and global regulators are concerned that the benefit poses a threat to the financial system by triggering a potential wave of defaults.
While a number of key dealers have agreed to the contractual changes on a voluntary basis, buyside firms may struggle to do so given their fiduciary responsibilities to investors.
Many buyside firms are concerned that they risk potential legal action from investors if they opt to give up any contractual rights that could be of benefit in the event of a bankruptcy situation.
As part of its latest consultation, the FSB intends to extend the new protocol to a broader range of banks through prudential means, requiring all regulated firms to sign up to the contractual changes on a jurisdiction-by-jurisdiction basis.
For buyside firms that do not sit under direct supervision, the protocol is likely to be extended through indirect means, such as requiring higher capital requirements on swaps contracts that are entered into with entities that have not signed up to the protocol.
Attempts to enhance legal certainty in cross-border resolution situations have been a key commitment for the FSB following publication of its September 2013 resolution report to the G-20 in St Petersburg. At the meeting, the FSB, chaired by Bank of England governor Mark Carney, committed to a cross-border implementation plan ahead of the G-20 summit in Brisbane. That meeting is scheduled to take place in mid-November.
“Unless resolution actions can be given prompt effect in relation to assets that are located in, or liabilities or contracts that are governed by the law of a foreign jurisdiction, authorities are likely to face obstacles in implementing group-wide resolution plans effectively for cross-border groups,” the FSB noted in a statement.
The board is accepting responses to the consultative document up to December 1. (Reporting by IFR’s Helen Bartholomew)
