IFR FIG Briefing: DNB and Suncorp emerge in choppy market

11 min read
Americas, EMEA, Asia

Banks from some of the world’s strongest jurisdictions emerged in the primary market on Monday, playing it safe with short-dated maturities as volatility rears its head once again.

On Monday, the iTraxx Senior Financials index is 3bp wider at 65bp, while the Subordinated index is 4bp wider at 95bp.

“It’s all very quiet out there and looking a bit soft,” said a syndicate banker.

“Additional Tier 1 bonds are under pressure again and are about a quarter of a point down on Friday’s close.”

Aareal Bank is continuing to monitor the market, looking for an opportune window to issue a high-trigger euro-denominated CoCo via lead managers BNP Paribas, Deutsche Bank and HSBC.

“Aareal need to do this deal, so it’s not a matter of cancelling it, they just need to find the right time,” said a lead manager.

In the primary market on Monday, DNB Boligkreditt was first out, opening books on a five-year covered deal at mid-swaps flat to minus 2bp. Lead managers decided to bypass what they saw as the “unnecessary” IPT process, going straight to guidance.

“I think with a straightforward issuer like DNB it doesn’t make sense to go out with IPTs unless you are doing an intraday execution,” said a syndicate banker.

“Investors seem happy with the process, as it just takes one extra step out of the process.”

For guidance on pricing, syndicate officials looked to DNB’s outstanding curve, as well as to a recent five-year from Danske Bank that was bid at minus 3bp, having priced at minus 2bp in the first half of this month.

“Secondary levels aren’t particularly helpful considering the ECB is underpinning the market, so it’s better to look to where similar credits have priced recently,” said the banker.

Fair value was estimated at around minus 4bp, indicating 1bp of new issue premium at the eventual minus 3bp pricing level. Guidance had been previously revised to plus 2bp area.

The pricing appeared attractive to a number of accounts, which combined to build a €1.75bn book for what will be a EUR1.25bn deal.

Elsewhere, Suncorp-Metway, rated A1/A+/A+, is the latest issuer to hit the sterling market to take advantage of a strong bid from domestic investors for floating-rate paper ahead of an expected interest rate increase in the UK.

“UK interest rates are likely to go up sooner rather than later, so there’s definitely a bid for bonds that will adjust to those conditions,” said a syndicate banker.

The Australian non-major went for a three-year maturity and began testing investor interest at three-month Libor plus 60bp area via NAB, RBS and UBS.

For guidance on pricing, syndicate officials looked mainly to Westpac New Zealand, rated Aa3/AA-, which priced a £450m offering last week at 46bp over Libor.

“Westpac has a one-notch better rating than Suncorp but still provided a good marker,” said a banker.

In the pipeline for tomorrow’s business, HSH Nordbank is preparing to sell a €500m seven-year mortgage backed covered bond via Credit Agricole, Commerzbank, Deutsche Bank, HSH Nordbank and NORD/LB.

SCBC, the Swedish Covered Bond Corporation, has mandated Barclays, BofA Merrill Lynch, Citi, Danske Bank and RBS to lead manage a new seven year benchmark euro covered bond, expected to be rated Aaa by Moody’s, backed by Swedish Residential Mortgages. The issue is expected to be launched in the near future subject to market conditions.

Tone weakens in high grade on news of Gross departure

News that Pimco co-founder Bill Gross was leaving to join Janus Capital Group sent investment-grade bonds wider Friday and raised concerns that next week will be difficult for borrowers.

The IG CDX 22 gapped out as much as 3bp on the news to 65.25bp – a significant move for the index - on expectations by some analysts that US$220bn Pimco Total Return Fund, managed by Gross, could lose up to a third of its capital.

“We expect asset outflows in the order of 10% to 30%,” said Thomas Seidl, the equity analyst of Pimco’s owner Allianz at Bernstein Research.

“We would expect a good deal of Pimco clients switching to Janus, simply attracted by the long track record of Bill Gross,” he wrote in a note.

Banks were hardest hit, widening out about 5bp across the board, while new issues such as Sysco and Roche were off their tights.

Coupled with equity volatility and the non-farm payroll report next Friday, there was concern the “Gross factor” could mean bigger new issue concessions on upcoming deals.

“We are expecting about US$20-US$25bn of new issuance in the week ahead, skewed toward corporates, but it will be a strange week,” said a senior manager at one of the biggest bond underwriting firms.

Pending trades include at least one large acquisition financing, according to syndicate desks, on top of the US$11.7bn of M&A-related issuance in the past week from Roche, Sysco Corp and Suntory.

With earnings blackout season approaching, issuers could be inclined to bite the bullet and get their financings out of the way.

“Issuers which have funding scheduled will likely continue to move forward, but depending on how the market feels on Monday you might see opportunistic issuers hold off,” the senior syndicate manager said.

The impact of flows out of PIMCO will be temporary.

“It’s not like this money will be pulled out of Pimco and stuffed under people’s mattresses,” said one banker.

“It will presumably go back into the market and will only have a temporary impact.”

But if even 10% flows out of Gross’s Pimco fund, it will take some time for the market to adjust.

“The question is what happens to an illiquid market if a fund the size of Pimco’s suffers huge outflows?” said the senior syndicate manager.

“Even just a 10% outflow from that fund would equate to an entire week’s supply.”

Possible market disruption caused by Pimco outflows comes at a time of increasing anxiety around the Fed’s ability to manage a smooth transition from a low rate environment to a higher one.

Recent equity volatility has also contributed to a weaker tone in recent days in high grade, not to mention the weight of absorbing more than US$126bn of issuance in September.

“There is fatigue in the market,” said Andrew Karp, head of investment grade bond syndicate for the Americas at Bank of America Merrill Lynch. “The increase in supply this month has created some indigestion on the buy side.”

“Investors still have plenty of money to spend, but I do think their price discipline has increased. They feel they are able to be choosier in deciding what they will participate in and if they don’t get what they want they feel they can sit it out.”

Novo Banco to convert BES clients’ debt products into deposits - RTRS

The successor to Portugal’s Banco Espirito Santo (BES) will propose that retail clients with senior debt products from the bailed-out lender convert their investment into deposits, sources said on Friday.

Novo Banco inherited the senior debt - bonds - from BES, Portugal’s largest listed bank, which had to be rescued last month after the collapse of the business empire of its founding Espirito Santo family.

It has agreed the conversion plan - aimed at ensuring the clients recover their investments in full - with the Bank of Portugal and the CMVM securities market regulator, the financial sector sources said.

The measure, the first practical step by Novo Banco’s new management to settle BES’ commitments, should be proposed to clients early next week, one of the sources told Reuters.

Another of the sources, who is close to CMVM, said the regulator viewed the solution as respecting the rights of the clients.

At the heart of the matter are over €400m in bonds maturing mostly after 2020 that BES sold to its retail clients incorporated into various financial products with short-term repurchase agreements.

The proposal entails the retail clients with products with underlying senior debt first authorising Novo Banco to sell their debt at market prices.

The difference from their initial investment would then be converted into deposits which offer either a 2.7% annual interest rate over a three-year period, or 4.25% over 10 years.

Withdrawals would be possible after the first 12 months.

The sources said the solution would aim to meet clients’ expectations of return on investment when they subscribed to the financial products.

BES was split up into the “good bank” Novo Banco and a bad bank holding the toxic exposure to the Espirito Santo business empire in the €4.9bn rescue arranged by the Bank of Portugal in early August.

The government wants to sell Novo Banco in the coming months to recover €3.9bn in public funds used to capitalise the bank.

The debt product conversion measure meets the Bank of Portugal’s requirements for any such operations to have a positive or at least neutral impact on Novo Banco’s results, capital ratios and liquidity.

One source said the next step would be to prepare an appropriate solution for retail clients holding shorter-term commercial paper issued by the Espirito Santo Group and sold by BES to its customers.

RHB Bank gives guidance for US dollar five-year

Malaysia’s RHB Bank kicked off bookbuilding on an offering of a US dollar benchmark 5-year senior unsecured bond at an initial price guidance to yield around 145bp over US Treasuries.

The offering, indicated at a size of around US$300m, follows a roadshow in Asia from last Wednesday.

RHB Bank has ratings of A3 from Moody’s and BBB+ from S&P, and the issue is expected to be seen the same way.

The Reg S deal will come off a US$5bn EMTN programme.

Bank of America Merrill Lynch, Deutsche Bank and RHB Investment Bank are joint bookrunners for the offering, which will price as early as today.

SUNCORP METWAY