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Sunday, 17 December 2017

On Greece and "Kling-ons"; Deutsche's gutsy FRN

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

It’s not often that I watch a movie on the television but last night I happened upon a Star Trek movie and wondered to myself where Captain Kirk and Mr.Spock are when we need them most. “Give me more power, Scotty!” “I’m giving you all she’s got”. “To boldly go….” Then this morning I wake up to the news that Greece has admitted that it will miss its budgetary targets for both 2011 and 2012. Not that anyone should be surprised but the response from the Troika will be interesting. While waiting for that reaction, Hong Kong has decided to pre-emptively trade down around 4-1/2%.

We appeared to have been having a kind of week where optimism was creeping back in – or was it just a rally into quarter end as we had seen at the end of Q2? We come back today to the stark reality that the Starship Enterprise in not headed in this direction and that “Beam me up, Scotty, there’s nothing worth saving here…” will meet with zero response.

Northern European taxpayers are becoming increasingly vociferous that they have no truck with “kling-ons” and that some of even the most enthusiastic Europhiles are wondering what it might have all been for. In terms of understanding, I picked a simile a while back which suggested, in the case of Greece and other weaker members, that if one wants to fitten up, then joining a gym alone is not enough. I think one could now stretch this a little further as other members are wondering who’s idea it might have been that if they do double the exercise, it will help the watchers on.

However, all this is great fun but it does not detract from keeping a firm eye on the fearful mess which a serious crisis in the euro would bring with it. Let us briefly assume that Greece goes into a so called orderly default. Let us assume that a 50% haircut is the outcome. We know perfectly well that the debt is no more worth 50% than it is worth 100%. However, if Greece remains within the eurozone it will be worth something. If, however, it were to be spun out, then either the debt will be re-denominated in a rapidly devaluing drachma and be worth dick on a stick or it will remain in euros in which case Greece’s already stretched debt/GBP ratios launch into warp-drive and the haircut turns into a total head shave.

As much as we moan about the indecisiveness of the authorities, I believe it is only fair to understand that they are faced with Hobson’s choice and they are pretty busy trying to identify a third way. All the while, markets are putting enormous pressure on them to find a instant and incontrovertible solution to this intractable problem.

Float on

All the while, the banking environment isn’t improving either. After a period during which banks have been issuing nothing other than covered bonds, it has been becoming clear that they will soon be knocking against their limits and that sooner or later someone is going to have to stick his toe into the senior unsecured debt market. Along popped, on Thursday, Deutsche Bank with a senior two year floating rate none. Priced at L3+89, it was generously priced, especially as outstanding paper in the same maturity space was trading in the low 70s. Deutsche got away €1.5bn and the bond traded neatly within its pricing range.

If Deutsche’s effort was to hail the reopening of the senior unsecured bank debt market, then senior remains the Arsenal of the bond markets with Triple B corporates being the Manchester United

It was, however, heart wrenching to think that a two year FRN by Deutsche should be making news headlines. Not so long ago, lead managing short floaters was a sign of weakness as investment banks would buy these short duration, low risk deals in order to boost their league table status. The game was to buy deals from German Landesbanks – you’d underwrite it in a billion or even 2bn size from one LB and sell it to another LB for a small loss. The latter would then pack the deal into a Pfandbrief without it ever seeing the light of day but at a cost of €100k for €1bn issuance. The cheap league table could be bought by the lead manager. Don’t get me wrong – this was being done on a daily basis and by most houses – with headline spreads of 7bp or 8bp.

Deutsche now has to pay 98bp and on Friday ABN AMRO followed up with its own two-year FRN which struggled to get to a size of €500mm at +130bp. If Deutsche’s effort was to hail the reopening of the senior unsecured bank debt market, then senior remains the Arsenal of the bond markets with triple-B corporates being the Manchester United.


One last word to my Scottish friends – you put a great fight on Saturday and deserved more of a result, especially after the close defeat by Argentina. Sorry, chaps. Better luck at Murrayfield on February 4th.

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