Saturday, 20 July 2019

Silver lining for investment banks amid Spanish gloom

They say that every cloud has a silver lining. Well, the bailout of Spain’s banks will lead to a wave of corporate sell-downs and investment banks will no doubt be rubbing their hands in glee at the prospect of earning some decent fees.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Spanish banks have long held strategic stakes in the country’s leading corporates and have maintained a cosy, if somewhat unholy relationship with them for decades (i.e. slightly murky mutual favour and influence peddling that also includes small-town mayors and municipal officials which is all unworkable under any realistic standards of good corporate governance).

The unravelling is an important step in bringing transparency to corporate Spain. But of course it will additionally provide a terminal cash valuation to banks in desperate need of capital and will reduce the overall size of the bailout. We’re talking here about potentially up to US$30bn equivalent of sales.

While the sellers are forced sellers, the assets are not distressed assets. Bank holdings include sizeable chunks of Telefonica (Bankia’s stake worth €420m), Repsol, Iberdrola (Bankia’s stake valued at €1bn), IAG, Abertis, Gas Natural, Adolfo Dominguez, Sol Melia, and many others. Pricing up the sales will be an art.

The multiple downgrades of Spanish banks, and Cyprus’s request for a bailout were no surprise – no real change to the Senior Financial CDS index – but they did add to levels of uncertainty

In the meantime, market professionals are left figuring out how to play the headline risk. The resultant market tone is a mixture of hope, expectation, confusion, puzzlement, exasperation. Oh, and fear. The multiple downgrades of Spanish banks, and Cyprus’s request for a bailout were no surprise – no real change to the Senior Financial CDS index – but they did add to levels of uncertainty.

Cash bond trading in Spanish bank names was pretty reactive to the ratings news both at the short end and in the mid-term maturities. Spain and Italy 10-year government bond yields widened, yet both curves saw some respite from the 2–10 flattening trends of the past couple of days. CDS markets generally are skittish; traders marked single-name Spanish and Italian corporates wider over the day on fears that they might be next in line to be hit by ratings downgrades.

Eurozone summit

On the summit, I don’t really know why the market has been on tenterhooks so far this week or harbouring expectations around concrete moves towards fiscal and banking union. If Angela Merkel reckons that euro bonds, euro bills and European deposit insurance with joint liability are economically wrong and counter-productive; and Germany’s deputy foreign minister is unconvinced that mutualisation is a way out of the crisis, isn’t it game over for any kind of meaningful EU Summit outcome?.

Seeming efforts by the new power Troika of France, Spain and Italy to create an ‘us versus Germany’ showdown will likely be futile. There’s no doubt that the concept of a centralised eurozone Treasury that can issue common euro bonds and engage in risk sharing is perfectly fine in principle, but surely only as part of a greater move towards fiscal and budgetary integration.

Without discipline held by a central authority that has teeth, big summit decisions in the absence of an agreed roadmap on this and which will at the same time calm the crisis are likely to be distant pipe dreams. Manuel Barroso, Herman van Rompuy, Mario Draghi and Jean-Claude Juncker, who jointly penned a document laying out integration modalities for the summit, know that perfectly well. Comments that Merkel could be backed into a corner and forced to make concessions are steeped in wishful thinking.

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