Periphery banks unlock funding markets

Intesa Sanpaolo and Santander reopened the public funding markets for eurozone periphery banks at a relatively high cost compared with cheap ECB money, but they successfully demonstrated market access and uncovered heavy investor demand, which meant it was worth the price.

The €750m two-year deal from Spain’s BBVA in October was the last true benchmark from a peripheral bank in the international bond market as investors shunned credits heavily exposed to volatile eurozone sovereigns.

Intesa was first off the mark on Monday, pricing a €1.5bn 18-month fixed-rate issue through Banca IMI, Deutsche Bank, Goldman Sachs and Societe Generale that attracted in excess of €2.7bn of orders.

This first senior unsecured euro issue from an Italian bank in eight months saw more than 70% sold outside the domestic investor base.

“This was the first Italian bank deal we have seen in months and it is a very important trade to get done,” said Roger Doig, credit analyst at Schroders. “Any bank that exclusively relies on the ECB for funding will have refinancing issues in time and other issuers should follow Intesa’s example.”

Other investors agreed and another argued that optimal bank funding and liquidity management was not purely about cheap central bank funding.

“An institution like Intesa needs to keep lines in the market and show it can issue,” said Satish Pulle, a portfolio manager at European Credit Management. “Also, you have to remember that ECB funding is collateralised funding, so any uncollateralised funding done by banks is good news for senior bondholders.”

“Any bank that exclusively relies on the ECB for funding will have refinancing issues in time and other issuers should follow Intesa’s example”

Santander followed quickly in Intesa’s footsteps with the first Spanish covered bond issue in eight months, a €2bn three-year through Barclays, Citigroup, Natixis and Santander that attracted €8bn of demand.

Just like the Intesa transaction, almost three-quarters of the bonds were sold outside of the domestic bid.

The two deals came after ratings agency Moody’s warned on Monday that European banks’ reliance on ECB funding could be credit-negative, saying that a prolonged absence from private funding markets could damage a bank’s investor relationships, adding that these negative effects were particularly relevant where elevated central bank reliance became structural rather than just temporary.

Both trades also come after a strong rally in the secondary market that sent dealers and investors scrambling to get their hands on financial paper.

Intesa’s and Santander’s cash and CDS curves have rallied by well over 100bp since the beginning of the year. During the course of this week, the Italian bank’s five-year CDS has tightened by more than 50bp and is set to close below 300bp, well inside the record of 626bp reached at the end of November. Meanwhile, Santander’s five-year CDS has almost halved since November and is set to close just above 240bp.

“The ECB/LTRO backstop is clearly an important dynamic for the market in that it means that there is liquidity available,” said a FIG syndicate banker.

“While it’s positive … it’s also a reminder that the system is still very much broken”

Market access, at a price

By any measure, the two deals were not cheap. In the case of Intesa, the trade priced at 295bp over mid-swaps, equivalent to a coupon of 4%, much higher than the ECB’s 1% repo but in line with its retail funding. Santander carried a 3.25% coupon.

“It’s good that they can get a deal away, and in the context of their balance sheet, paying 300bp doesn’t really move the needle,” another fixed income investor said.

“I don’t know if it’s a positive signal, though: 300bp over for 18 months, when you can go to the ECB and get three-year at 1% seems a bit bonkers. So while it’s positive – and with any luck, their next deal will come tighter – it’s also a reminder that the system is still very much broken.”

One banker on the Intesa’s deal said it was an important step forward because investors were finally buying Italian bank credit but did not think it signalled that markets were fixed.

Market participants also argue that in the context of Intesa’s and Santander’s balance sheets, the two deals are a mere drop in the ocean. One deal of €1.5bn is nothing compared with Intesa’s customer deposits of €400bn said one, while another said that doing short-dated deals made these spreads more palatable.

The Intesa and Santander deals tightened by 40bp and 20bp respectively, with both deals deliberately kept short by managers.

“Other institutions are likely to want to make similar statements to the market and show they can stand on their own two feet,” said one head of FIG syndicate.