When the US Federal Reserve cut interest rates by 50bp – to 4.75%–5% – you would have been forgiven for expecting bank stocks to fall given that they have benefited from the move to higher interest rates over the past few years (especially considering that the futures market is suggesting a Fed funds rate of less than 3% by the end of 2025). In fact, bank stocks rose, presumably because investors think the rate cut reduces the risk of a recession and therefore lessens credit risks. For bank investors it was a case of heads you win and tails you win. But there will be earnings pressure from the drop in interest rates – and it will be concentrated on the mega banks that have benefited most from the easy money that comes from being able to hold deposit rates down as interest rates rose. When it comes to the headwind (or tailwind) of net interest margin, the retail banking business gets the most attention, and yet the interest rate exposure of the largest corporate and investment banking divisions shouldn’t be underestimated. Citigroup, for example, made a big noise about its newly constructed “services” division in June 2024 even though the underlying growth in this business – which includes transaction banking and security services – has been sluggish at best in recent years. That the division had something to shout about was essentially the consequence of net interest income that almost doubled between 2021 and 2023 to US$13.2bn and continued to grow this year. In the first half of 2024, the NII of US$5.4bn in the transaction bank was flat year on year but the securities services side saw NII grow 15% to US$1.2bn. A similar trend could be seen at other leading corporate and transaction banking networks. For instance, JP Morgan’s payments business added around US$4.5bn of revenue owing to higher interest rates in 2023 and these remained at elevated levels in the first half of 2024. Most dramatically, all of Bank of America’s global banking business revenue growth last year was driven by the addition of US$2.5bn of NII (although some of this has been given back in the first half of this year). Net interest margins for the division expanded from 2.26% in 2022 to 2.73% in 2023. Its NIM in the first half of 2024 was 2.44%. Certainly margins across these units will be pressured by lower rates. Mixed picture Despite the Dodd-Frank regulations that were designed to ensure that investment banks' markets divisions were all about transactions for third parties rather than prop trading, NII still plays a significant role in the profitability of these units, although the picture is more mixed and disclosure on underlying drivers is opaque. NII is generated typically by the offset between high-yielding assets that the trading desk is warehousing temporarily and the bank’s funding costs. An additional complexity is that trading desks are likely to have offsetting derivatives positions that create gains and losses on the principal transaction line of the P&L. This could be revenues from hedging or market-making that have an associated cost of funding. Hence NII tends be generated in FICC while equities can be a drag. The biggest numbers come from Citi, which reports NII contributing over one-third of its markets revenues. This NII increased by 25% in 2023 on 2022 to US$7.3bn and is up 5% in the first half of 2024. Bank of America’s markets business is annualising at around US$3bn of NII, albeit there has been some volatility in this in recent years. JP Morgan’s markets business has seen NII fall from US$8bn in 2021 to around zero in the last 18 months. The FICC component of that number is much healthier (US$7.1bn in 2021 and annualising slightly above that in the first half of 2024), presumably because it is benefiting from higher rates. That suggests, though, that the equities component largely wiped out FICC’s NII contribution and indeed the bank hi

Hong Kong IPO market sentiment is seeing signs of improvement as Midea Group is trading well after its mega listing and China has introduced a spate of monetary stimulus measures to revive the world’s second-largest economy and its stock markets. Adding to the good news, Chinese kitchenware maker Carote on Wednesday closed books early for its Hong Kong IPO of HK$751m (US$96m) and priced it at the top of the range thanks to strong demand. And China Resources Beverage (Holdings), which secured listing approval in early August from Chinese and Hong Kong regulators, started premarketing on Thursday for a Hong Kong IPO of US$500m–$1bn after staying on the sidelines for more than a month. The stellar aftermarket trading of Shenzhen-listed Chinese home appliance giant Midea in Hong Kong, together with the recent strong run-ups in the Hong Kong and mainland China stock markets, have drawn investor interest back to the Hong Kong IPO market. The strong response to the Carote deal highlights the shift in sentiment. While IPOs of such size in recent years have mainly been supported by friends and family orders, the Carote float drew upbeat demand from institutional investors with the books multiple times covered. Retail investors also flocked to the deal, placing orders totalling HK$102bn, or more than 1,350 times the number of shares available in the retail tranche. “We have expected a certain level of participation from institutional investors as Carote is profit-making and its IPO valuation is reasonable. The strong performance of Midea also shows investors that they can actually make good money from Hong Kong IPOs,” said a banker on the deal. The Hong Kong shares in Midea have performed well since its listing on September 17. The stock closed at HK$77.70 on Thursday, up 42% from the issue price of HK$54.80. The HK$35.7bn listing, the world’s second-largest this year, has helped Hong Kong become the world’s fourth-largest IPO market this year, just behind the US (Nasdaq and NYSE) and India, according to LSEG data. “The final demand level [for Carote] is way beyond our expectations. We are very lucky to have China announce the stimulus measures during our bookbuilding,” said the banker. The People's Bank of China on Tuesday cut banks' reserve requirement ratio by 50bp and lowered the seven-day reverse repo rate to 1.5% from 1.7%. China will also set up a swap facility allowing qualified brokerages, funds and insurance companies to tap central bank financing for stock purchases, and is considering plans for a market stabilisation fund. As of Thursday, China's CSI300 blue-chip index had gained 10.4% since Tuesday, while Hong Kong’s Hang Seng Index was up 9.2%. Carote sold 130m primary shares, or 24.3% of the enlarged share capital, at the top of a HK$5.72–$5.78 range, representing a 2024 forecast P/E of 7.96. Cornerstone investors Matrix Partners and Genesis Capital each took US$20m of the deal. The company posted a profit of Rmb88.5m (US$12.5m) for the first three months of 2024, up 58% from a year earlier. Its shares start trading on Wednesday. BNP Paribas and CMB International are sponsors. Peer gains China Resources Beverage, the beverage unit of China Resources Holdings, is planning to wrap up its deal in October. “The company aims to complete the IPO before the US presidential election and the recent stock market rallies provide a good window,” said a banker on the deal. The surge in shares of larger rival Nongfu Spring is expected to benefit the IPO. The stock closed at HK$31.10 on Thursday, up 19.4% since Tuesday. China Resources Beverage produces bottled water under the “C’estbon” brand and bottled milk tea, black tea and coffee. It posted a profit of Rmb461m for the first four months of 2024, up 29% from a year earlier. Bank of America, BOC International, Citic Securities and UBS are sponsors.

That’s almost a wrap. Greece is expected to all but complete the exit from its big banks in the next two weeks, 11 years after stepping in to bail out lenders. It has been a long and rocky recovery following a sovereign debt crisis that left Greece on its knees, but it has featured some bold and innovative capital market transactions, including a flurry of sales in the last 13 months, according to executives and investment bankers interviewed by IFR. “It’s a remarkable turnaround story. It wasn’t easy or obvious it could happen,” said Christos Megalou, CEO of Piraeus Bank, which was considered to be in the worst shape of the four systemic banks when the recovery plan started. “Our ambition is to be a Harvard Business School case study,” said Megalou, a former Credit Suisse investment banker who was appointed CEO in April 2017. The Hellenic Financial Stability Fund has sold its holdings in Piraeus, Alpha Bank and Eurobank since September 2023. It is expected to sell about 10% of National Bank of Greece in the next two weeks via an offering of shares to international and domestic investors, three banking industry sources told IFR. HFSF owns 18.4% of NBG and a full exit was previously on the cards. The government is now expected to keep an 8% stake because keeping part of the national champion could be strategically useful and give Greek taxpayers exposure to any potential upside in the shares. Even without a full exit, bankers said the NBG sale is significant and symbolic. HFSF pumped €46.2bn into the banks in 2013 and they have had their ups and downs alongside political and economic swings. In June 2015, for example, Greece imposed capital controls that briefly shut the banks and limited cash withdrawals to €60 per day to prevent any runs. The controls were eased but not fully removed until September 2019. The mood has changed significantly in the last three years, reflected by overseas interest in recent stake sales and bumper demand for the banks' bond deals. Bankers said the groundwork for the sales was laid from 2016 to 2020, when each bank had to start offloading huge amounts of non-performing exposures and restructure to make outside investment a possibility. The sovereign crisis had left the banks with €106bn of NPEs on their books, or 49% of their loans. Getting rid of the bad loans was slow at first but there was a step change when Greece’s finance ministry started the Hellenic Asset Protection Scheme in 2018, dubbed Hercules. It allowed exposures to be securitised and gave state guarantees for the senior tranches, similar to a plan by Italy to tackle its mountain of bad debts. The portfolio sales were complex and difficult – and hindered by Covid-19 – but all four banks used Hercules to offload huge chunks of loans to the likes of Cerberus, Pimco and Davidson Kempner. “[Hercules] allowed the banks to effectively dispose of the NPLs at prices that were not too prohibitive for their capital,” an investment banker in Athens said. Piraeus, for example, had €35bn of NPLs by face value at the end of 2016, representing 52% of its loan book. It was trimmed over the next four years, then slammed lower as portfolios called Phoenix, Vega and Sunrise were offloaded. At the end of June, Piraeus' NPEs represented just 3.3% of loans. The NPE ratio at NBG and Eurobank is similar, and is down to 4.7% at Alpha. To make use of the scheme, however, banks needed the capital headroom to take the losses that came from selling loans at big discounts. That required the banks to access capital markets, including sales of their loan servicing companies. “There were a number of transactions that collectively created the capital headroom to deal with the NPL crisis,” the investment banker said. Basket case to case study? Piraeus led the way with some landmark deals. “Piraeus was the ugly child of the four systemic banks. Their starting p

A potential buyout of French drugmaker Sanofi’s consumer healthcare business and Canadian fund Brookfield’s take-private bid for Spanish blood-plasma firm Grifols are drawing near, and both deals will prompt jumbo leveraged financings of around €10bn, which would be among the largest this year. Given the size of the financings, they are expected to use the term loan B and high-yield bond markets in Europe and the US to maximise the pool of investor liquidity available. “There were deals in excess of €10bn in the past. I think the market nowadays could absorb sizeable deals if they are rightly structured and get dollar access,” said a leveraged finance banker. The broadly syndicated market has come back strongly this year, supported by record year-to-date issuance of European CLO funds, which are the largest buyers of loans. Strong technicals have driven down pricing for Single B rated borrowers to 375bp over Euribor from approximately 425bp this time last year. That has given confidence for banks in Europe to underwrite credits at six times' leverage, although only for high-quality credits. “For a very high enterprise value multiple and a good credit, would [lenders] go up to six? Yes I think so. I don’t think there are any recent examples of such deals that have come to the market but the debt package that is being discussed for Sanofi is in that range,” said a second leveraged finance banker. The jumbo financing opportunities are a welcome sight for lenders, starved by a lack of global dealmaking activity this year due to the valuation gaps between sellers and buyers. Private equity firms have held assets for longer than usual as they await better valuations to maximise returns. Bankers say discussions with sponsors over the past few weeks signal a recovery in potential acquisitions, with interest rates trending down and PE firms under increasing pressure to return money to investors. “M&A is definitely coming back,” said a third leveraged finance banker. “Any sort of activity is good news because it means we're in a good place with valuations. It feels like there's a spur. I don't think that necessarily means anything for 2024 but we feel good about 2025.” Mirror image Banks have underwritten debt financings of approximately €9bn to back the potential buyout of Sanofi’s consumer healthcare business, and a decision over the sale is close. PAI Partners and Clayton, Dubilier & Rice are the remaining bidders for the business and both have lined up separate financings. The financing structures for the two bids look similar, with banks proposing €7.5bn senior secured loan facilities and €1.2bn revolving credit facilities, sources said. In addition, private credit funds will provide around €1.5bn–€2bn through payment-in-kind notes. That brings the total debt package to more than €10bn, making the deal one of the largest LBO transactions in Europe this year. The senior secured debt equates to around six times' Ebitda, and the whole debt package reaches 7.5 times if taking into account the junior debt. Sanofi is running a dual-track process for the business, considering a sale and a public listing. Sanofi chief executive Paul Hudson said on Monday he hopes to provide an update on the process at the third-quarter earnings call in October or sooner. He also said the company is interested in keeping a stake in the business regardless of whether it is spun out in a listing or sold. Opportunity knocks Meanwhile, banks are looking into a €9.5bn underwriting opportunity for Brookfield's potential bid for Grifols, and are expected to give commitments in a month's time. In July, Brookfield and the Grifols family, which owns 30% of the company, agreed to evaluate a possible joint takeover bid for all Grifols shares with the intention to delist the company. Grifols said earlier this month that Brookfield and the fo

Avon’s bonds slumped last week after payouts on credit derivatives linked to the bankrupt beauty brand were far larger than traders had anticipated. The price of Avon's 2043 bonds had plunged to 33% of face value on Thursday, down from 54% on Monday, according to LSEG data, in the wake of an auction to establish payouts on the roughly US$900m of credit default swaps referencing the company's debt. The decline capped a remarkable run of losses for holders of Avon's bonds, which had traded near par just days before the company filed for bankruptcy protection on August 12. “The whole thing obviously took the market by surprise,” said a credit market analyst at a large dealer. “Both bond and CDS investors weren’t really expecting the outcome of the auction that we saw.” CDS auctions are designed to establish a market price for defaulted bonds and determine how much money CDS sellers should pay CDS buyers (CDS buyers who settle in cash receive the difference between the cash price for the bonds established at the auction and par). Anyone can participate in the process, meaning auctions often represent a good opportunity for investors to buy or sell the defaulted securities. The result of the Avon CDS auction on Tuesday implied that the company's bonds were worth just 34% of face value, despite bond dealers having quoted them at a much higher price only hours before. That meant CDS holders received a payout of 66 cents for every dollar of protection they bought. Auction controversy The run-up to the Avon CDS auction had its share of controversy due to the tiny amount of bonds – just one security with US$22m of principal – that had been identified to settle US$888m of Avon CDS that Depository Trust & Clearing Corp said was outstanding as of September 20. There have previously been concerns that constraining the amount of debt in CDS auctions could produce unusual results. Barclays had argued that more debt should be included in the auction in the form of a US$405m promissory note that Avon had with an affiliate of its Brazilian parent Natura. That motion failed to gain support, though, and the Credit Derivatives Determinations Committee – the industry body that rules on matters in the US$8.7trn CDS market – stuck with its initial decision that only the US$22m Avon bond could be used. Barclays declined to comment. Some believe the lack of bonds made the auction process far more uncertain. "People really had a hard time guessing what the proper price should be," said one derivatives lawyer. "Many would have guessed a lower number for the likely recovery for [Avon] bondholders than what most of the participating bidders came out with. That [final price] was really driven by the fact that … the only deliverable obligation admissible is one that has very little liquidity ... with US$22m outstanding," the lawyer said. No harm done In the end, the small amount of Avon bonds didn't do any harm to CDS protection buyers. CDS auctions comprise two rounds. First, bond dealers provide quotes to give an initial indication of the value of a company's debt. Then, in the second round, physical CDS settlement requests are filled (where the protection buyer delivers the relevant bonds in return for an appropriate cash payment) by dealers placing limit orders. The final price at which these physical requests are filled becomes the CDS payout for those settling their contracts with cash. This dynamic means that an imbalance between buyers and sellers of the bonds in the second round can affect the final CDS payout. Bond dealers on average indicated the Avon bonds were worth about 63% of their face value in the first round – higher than where LSEG data show them being quoted in the wider market at the time. However, the second round of the auction produced a much lower final settlement price of 34 cents on the dollar amid flagging demand to fill the US$13m of net demand to sell