The euro short-term rate, otherwise known as €STR, has become the default benchmark for the euro leg of cross-currency swaps, a new dynamic that is boosting the adoption of the risk-free rate in derivatives markets more broadly. The euro area has become an outlier among major financial markets following the decision to reform rather than eradicate Euribor (its version of the troubled Libor lending benchmark) that underpins about US$150trn in financial contracts. But moves by most other regulators to drop Libor from their home markets have increasingly had an impact on derivatives trading norms in Europe in recent months too. The demise of US dollar Libor in June – and its replacement by the secured overnight financing rate – marked a watershed moment in this shift after SOFR became the reference rate for the US dollar leg in euro-dollar cross-currency swaps. That in turn has fuelled a surge in uptake in €STR, the risk-free equivalent rate in euros, for the European leg of those trades. Traders say €STR has become the go-to interest rate benchmark for all cross-currency swap transactions involving a euro leg, a trend that has contributed to €STR representing more than a third of trading activity across euro derivatives markets in October compared with about 20% a year earlier, according to analytics firm ClarusFT and trade body ISDA. “One driver of this activity is the familiarity that clients now have with risk-free rates in other currencies,” said Mark Rogerson, EMEA head of interest rate products at CME Group. “The vast majority of cross-currency transactions include a dollar leg and with SOFR being an overnight index most participants want the non-dollar currency leg to also be an overnight index.” The last vestiges of US dollar Libor disappeared on June 30, ending a decade-long saga to strip the controversial interbank lending rate from more than US$200trn of financial contracts. That left the euro area as one of few jurisdictions that hadn’t transitioned to a risk-free reference rate for derivatives and other instruments. More than 85% of trades in the US$35trn cross-currency swap market feature a US dollar leg, according to data from the Bank for International Settlements, while around US$14trn of trades have a euro leg. Simon Green, head of cross-currency and short-term interest rate trading at Nomura, said 80%–90% of the bank’s cross-currency swap business is now €STR-based for transactions that feature a euro leg, as risk-free rates have become the market standard for cross-currency swaps in interbank trades. That development means client trades using €STR for the euro leg instead of Euribor will typically face transaction costs that are between a quarter and a whole basis point lower, depending on the size and tenor of the swap. There have been almost 6,500 euro-dollar cross-currency trades worth US$1.06trn since the end of June, according to swap data repository DTCC and ISDA. “It’s fair to say that the Euribor fixing has been volatile in 2023 so avoiding that uncertainty is something our customers are keen to do,” Green said. Euribor lives on Despite this growth, Euribor is still prevalent in financial markets. New debt sales in euros are predominantly pegged to three-month Euribor, said Kilian Frensch, head of euro swaps at Nomura – with the “occasional €STR or six-month Euribor variations”. Most longer-dated interest rate swaps also reference Euribor. But at the shorter end of the curve, “almost all” derivatives risk exchanged in Europe with a tenor of two years and below is pegged to €STR, said Rogerson. “Benchmark consistency is key. Following the transition to SOFR there has been greater education leading to more operational, back office, and P&L systems support when it comes to using overnight index products,” he said. Concerns around the future of Eur

Shares in MicroPort Scientific plunged 25% on Wednesday after the Chinese medical device maker raised US$220m from an upsized five-year put three convertible bond that coincided with negative news elsewhere. The deal was launched on Tuesday with a base deal of US$200m and a same-day upsize option of US$50m. The CB was priced at the investor-friendly end of terms. The coupon and yield to put/maturity came at the top of the 4.75%–5.75% range and the conversion premium at the bottom of the range of 30%–40% over the clearing price of a concurrent delta placement. The clearing price was set at HK$9.83, a 15% discount to the close of HK$11.56 on Tuesday. It is understood that joint bookrunners JP Morgan, CICC, Citigroup and Bank of America conducted a US$75m delta placement to facilitate hedging for investors participating in the offering. That should have softened the impact of the CB sale on the stock price, but the magnitude of the slump on Wednesday was far greater than expected. “I think what happened was once the stock fell more than 15%, those who participated in the delta placement started dumping the shares,” said a banker away from the deal. “It’s hard to understand why the issuer brought the deal to the market at year-end when no investors would want to take the risk of waiting for the stock to recover,” said the banker. “They need the money to refinance the existing CB and everyone has been expecting this deal for months.” Unfortunate events People familiar with the situation said the disappointing outcome was the result of a series of unfortunate events. After the banks wall-crossed investors with the MicroPort deal, WuXi Biologics on Monday said it expected lower revenue growth from its development division as its 2023 projects goal was too bullish. Shares in the Chinese pharma tech giant plummeted a combined 30% on Monday and Tuesday. Adding to the negativity, Moody's on Tuesday cut China’s credit outlook to negative as it expects Beijing’s support and possible bailouts for local governments and state-owned enterprises to affect the fiscal, economic and institutional strength of the world’s second-largest economy. "Against such a backdrop, there was discussion on whether the issuer and the banks should take the deal forward," said one of the people. "But since it's wall-crossed and the indicative demand for the CB was strong, they decided to go ahead." Demand for the delta placement, however, was weaker than expected as the leads originally expected it to be around US$100m. “The sell-off in shares [on Wednesday] just shows how negative investors are towards China’s economy and the healthcare sector,” said another person. MicroPort plans to use the proceeds to refinance medium and long-term offshore debt and as working capital. Alongside the CB offering, MicroPort is set to repurchase US$217m of a CB due in 2026, which had US$665m outstanding. The CB will be repurchased at 99 cents on the dollar and was trading at 96.50 on Tuesday in the secondary market. In June 2021, MicroPort raised US$700m from a zero-coupon five-year put three CB that priced at a 1% yield and a 32.5% premium. The conversion price of the CB due 2026 is HK$92.8163, compared with the HK$12.779 conversion price of the new deal. MicroPort shares closed at HK$8.68 on Wednesday and are down 58% this year. Given the much better terms offered by the new CB, many existing CB holders chose to roll over to the new bond. Books were multiple times covered with strong support from existing CB holders and long-only investors. Allocations were concentrated with the top 10 investors taking more than 80% of the deal.

JP Morgan, Citigroup and Wells Fargo have brought the latest in a wave of bank-level offerings from the biggest US lenders, adding to the revival of senior opco issuance from the cohort. The trio of offerings in the past two weeks came as deposit declines across the US banking industry, in part driven by higher interest rates, have made it important for lenders to offset those outflows with wholesale funding, including loans from the Federal Home Loan Banks system and brokered certificates of deposit. "That is not at all surprising at a point when you're beginning to see deposit balances dropping and deposit costs going up," said Greg Hertrich, head of US depository strategies at Nomura. "It's a very natural thing to do." This was a change from 2020 to 2022 when fiscal stimulus measures and the US Federal Reserve's quantitative easing led to a boom in cheap deposits at the expense of wholesale funding. But this year senior bank-level bond issuance from the big six US lenders (which also includes Goldman Sachs, Morgan Stanley and Bank of America) has reached nearly US$30bn, up from no supply last year, according to IFR data. Some of these deals were the first opco offerings from global systemically important US banks since 2019. Banks will continue to look for ways to fine-tune their balance sheets after the collapse of a few mid-sized US regional lenders earlier in the year threw attention on how banks are funded. "I would argue that one of the lessons that came out of the regional bank dislocation earlier this year was that every depository management team is going to be asked about their funding structure and, as such, it behooved most of those management teams to not only do the work but also be prepared to announce the results," said Hertrich. JP Morgan priced a US$3.75bn two-part senior unsecured banknote on December 5 targeting the three-year maturity in fixed and floating-rate formats. The US money-centre bank landed a US$2.75bn three-year fixed tranche at Treasuries plus 78bp, while a US$1bn floater landed at SOFR plus 78bp. The self-led transaction's structure was identical to the two most recent opco deals from Wells Fargo and Citigroup, which priced on December 4 and November 27, respectively. In total, the three banks raised US$9bn of opco bonds. "It seems like whoever has bank-level needs is doing it now," said Nicholas Elfner, co-head of research at asset manager Breckinridge Capital Advisors. Banks are flush with regulatory capital, reducing the need to issue loss-absorbing holdco bonds. "[It] makes sense to issue out of the higher-rated bank level without the need for loss-absorbing capital for every debt issue that you bring to market," said Dan Bruzzo, a managing director at Santander US Capital Markets. The fact that opco bonds do not count as loss-absorbing capital has proved an attraction for some buyers. A banker familiar with the Citigroup offering said it drew strong demand from China and Japan for that very reason – because those investors like the higher ratings relative to bail-in debt and aren't keen on having to price the bail-in risk of US banks – despite the broader trend of Asian investors being reluctant to buy US corporate bonds this year due to the unfavourable currency hedging costs. US investment-grade issuers raising funding are benefiting from the sense among investors that this could be the last chance to add paper and replenish their portfolios before the end of the year, said market participants. The strong technicals have in turn helped tighten credit spreads. The average US investment-grade bond spread on Tuesday was 112bp over Treasuries, down 26bp from the start of 2023, according to ICE BofA index data.

Qatar’s sovereign wealth fund has sold more than one-third of its stake in Barclays for £510m, marking its biggest sale of shares in the UK bank since piling in to help it avert a UK state rescue in 2008. Qatar Holding sold 361.7m shares in Barclays in an accelerated bookbuild on Monday at 141p per share, a slim 1.4% discount to the 142.98p close. Bank of America and Citigroup were joint bookrunners on the offering. The shares fell to 136.5p the following day, but stabilised and were trading on Friday morning at 141.9p, barely changed on the week. Qatar opted to run an auction of the stock among several banks, with BofA and Citi winning the trade and launching into the market at 5:10pm in London with guidance of 141p to the 142.98p close but they were unable to sell all the shares. Two bankers involved said their residual positions were not a cause for concern. "We offloaded a good chunk [of stock]," said one of the bankers involved. "It’s a big liquid stock and the banks were comfortable with the amount [remaining]. It’s a perfectly manageable amount." The placing represented about three days' trading volume. A head of ECM not involved in the deal said there had been a rumour in recent weeks that Qatar might trim its stake. Other senior bankers wondered about the wisdom of Qatar's decision to conduct an auction that resulted in the lead banks holding stock and caused Barclays shares to fall the next day, given the seller is a strategic shareholder of many years and retains a significant shareholding. The alternative is to select banks working on a best-efforts basis, potentially including a wall-crossing exercise ahead of launch if necessary, in an effort to ensure the shares were fully distributed and minimise impact on the stock price. Another head of ECM contrasted Qatar's approach with that of Singapore's GIC, which sold its crisis-era investment in UBS through the Swiss bank on the basis it was best placed to find buyers at the correct price. Qatar Holding is a fan of auctions, which are often used by sellers who need to show they achieved the best price possible, having already auctioned blocks in French construction group Vinci in February and hospitality group Accor in May. Both of those were won by BofA on a sole basis. A banker on the Barclays deal said there was demand from shareholders and new investors, with a mixture of long-only and hedge funds involved. It appears to be the second major sale of shares by Qatar since the start of 2022, although there was some confusion about that fact and the size of the stake ahead of the sale, perhaps due to two different ownership entities being involved. Qatar Holding is owned by Qatar Investment Authority. Barclays said QIA owned 847.6m shares before the sale, giving it a 5.6% stake, after reducing the holding from 1bn shares in January 2022. Monday's sale represented 43% of the holding and left QIA with 486m shares, equivalent to a 3.2% stake, leaving it as Barclays' fourth biggest investor. Barclays said in its last annual report, however, that Qatar Holding owned 1.017bn shares at the end of 2022 and indicated it had not sold any shares for years. The discrepancy could be explained by the SEC having stricter disclosure requirements than the UK Financial Conduct Authority’s disclosure and transparency rules. Time to move on Qatar Holding has pledged not to sell any more shares for 60 days, although the timing of the sale is a dent to Barclays' attempt to revive its share price. "They’re a strategic shareholder selling half their position," said a banker away from the deal. "There’s a reputational question to be asked here." "You have to think QIA has decided to move on," said a second banker on the deal. The sell-down may also reflect a more negative stance on European banks from the sovereign wealth fund after taking a hit on Credit Suisse this year. QIA increased its stake in the troubled Swiss bank to 6.9% at the end of 2022,