Buysiders avoid SEFs with non-standard swaps

Attempts to shoehorn much of the US$710trn over-the-counter derivatives market on to exchange-like platforms have gained little traction within the buyside community. Industry estimates suggest that as much as three-quarters of buyside interest-rate swaps trading is avoiding newly created swap execution platforms by using forward or backward-starting structures, which are exempt from Dodd-Frank’s SEF trading mandate for standardised swap products. For dealer-to-client trades, the dominance of forward-starting structures is nothing new. But if it keeps those users off SEFs altogether, regulators are likely to swoop in and extend the list of swaps mandated for exchange-like execution. The real frustration is being felt by the SEFs themselves. Already in a saturated market with 24 licensed platforms, many are struggling to make ends meet. And just six months into their existence, talk of consolidation is rife. For their part, buysiders continue to bemoan a range of operational, legal and regulatory compliance hurdles associated with becoming a direct SEF member. Some even complain that sellside firms are encouraging them to stay off the platforms altogether, as dealers fear an erosion of their information advantage will further dent ailing rates revenues. But as SEFs fight to stay in the game alongside a swaps trading overhaul – which has so far proved to be little more than the electronification of existing infrastructure, rather than the revolution that many envisaged – they do have one final trick up their sleeves. Under the CFTC rules, the power to add new products to the swaps trading mandate begins with the SEFs themselves. By making a “made-available-to-trade” application to the CFTC, those additional products would be considered for SEF trading. Once suitability is determined, those products could no longer be traded off-SEF. It is still early days for the SEF world, and it’s unlikely that regulators will allow any apparent loopholes to remain open in the long run. The only question is how many of the two-dozen platforms will still be around to feast on the spoils. Desperate times When the US Supreme Court refused in June to hear an appeal against a ruling that Argentina must pay in full a group of investors that refused to participate in the country’s debt exchanges, it appeared to be another victory for Paul Singer. Yet in the weeks since, it’s become clear that those investors – led by Singer, the billionaire founder of Elliott Management – are the party being backed into a corner, not Argentina. In a sign of desperation, Elliott last week served subpoenas on two Chinese state-owned banks, ostensibly to gather information on their involvement in the financing of two projects that are part of a signed agreement between Argentina and China. Elliott wants to understand the mechanics of these deals to establish whether it can make claims against assets to which Argentina has a legal title. Whatever it finds out (assuming the banks even comply), it’s hard to see how the holdouts could enforce claims either in China (where the financings originate) or Argentina (where the projects are located). While the law – controversially – might be on the side of the holdouts, actually realising claims is nigh on impossible. Meanwhile, their leverage over Argentina is slowly but surely ebbing away. Their most potent weapon was the threat of pushing Argentina into another default if the sovereign didn’t make them whole at the same time as servicing the debt of investors in the 2005 and 2010 exchanges. But the government of Cristina Fernandez de Kirchner refused to blink, no doubt calculating that it had little to lose by being forced back into default. Yes, Argentina would clearly like to return to the international capital markets. But as it hasn’t issued new debt there for 13 years, time is not really of the essence. Argentina’s bonds trade at high yields but they did so even before the default. Their prices haven’t collapsed. And with

John Deere and Ally Financial were the only two US ABS issuers to print deals in a quiet week yielding just US$1.751bn, as the last hurrah of summer kept many bankers and investors away from their desks. Year-to-date ABS issuance rose to US$139.502bn, as of late Friday morning, according to IFR data. That put volume US$10bn ahead of the US$128.737bn tally SDC had for this time last year. Excluding self-funded issuance, US$125.382bn had priced as of late Friday morning versus US$115.993bn last year, according to SDC. John Deere’s US$1bn JDOT 2014-B trade via RBC (structuring), Citigroup and MUSI, which bundled new and used agricultural and construction equipment loans, had a better showing than Ally’s subprime auto loan deal. Its four Triple A classes priced mostly 1bp–2bp inside the issuer’s similar print in April, according to IFR data, with its longest 3.28-year A4 offering the most yield of its classes at a still-slim 1.512%. The tranche priced at interpolated Swaps plus 25bp, versus 27bp on a similar class from John Deer’s spring issuance. Overall US$8.9bn equipment loan and lease ABS deals have priced so far this year, according to IFR data. In the more volatile subprime auto loan sector, Ally Financial cleared the US$750m AFIN 2014-3 via Citigroup, Credit Agricole-CIB and JP Morgan. It was its third deal this year. The subprime auto ABS sector has come under sharp scrutiny of late. Both General Motors and Santander Consumer USA Holdings in early August acknowledged subpoenas from the Department of Justice about their securitisation underwriting platforms. This was the first subprime deal from Ally since those probes were revealed and sent riskier tranches in subprime auto wider. For its part, Ally CEO Chris Halmy said that despite sharp competition and “noise about loosening lending standards,” his firm had not shifted its risk appetite in the past two years, while speaking during the firm’s quarterly call in late July.   Spreads on the Ally deal were mostly unchanged at the top, ending just 2bp wider on its Triple A rated US$255m A1 and US$166m A2 classes, versus the issuer’s previous deal in April. But the gap was a more bulky 20bps on its riskier US$32.71m A3/BBB rated D class, which printed at interpolated swaps plus 160bp. It retained the US$38.2m Aa1/AA rated Class B and US$36.19m Aa3/A rated Class C tranches. The issuer had previously offloaded those classes on all its deals over the past two years, according to IFR data. Two deals priced in the CLO market. Octagon Loan Funding Ltd printed via Greensledge Capital Markets. The US$413m deal for portfolio manager Octagon Credit Investors had a Class A1 tranche that printed at three-month Libor plus 145bp, down to the junior E class which priced at 520bp.  And Atlas Senior Loan Fund VI, a US$564m issue managed by Crescent Capital Group LP, came with a Triple A rated Class A at Libor plus 154bp, down to the junior E class at 540bp via Deutsche Bank.

Associated British Ports completed £400m of revolving credit facilities to refinance a remaining £50m term loan and replace £325m of undrawn revolvers that were due to mature in 2016. The new financing is split between a £300m five-year facility from ABP’s existing bank syndicate and a £100m eight-year bilateral facility. The loans being replaced date from 2011 and were part of a £1.86bn refinancing that comprised an £850m three-year term loan, a £325m five-year term loan, a £225m seven-year term loan, a £250m five-year capital expenditure revolver and a £75m five-year working capital revolver. There was also a £135m five-year liquidity facility. ABP said in July 2013 that it had completed the early refinancing of the £850m term loan, which was due to mature in December 2014.

Banco Santander and UniCredit will provide the first test of investor appetite for Additional Tier 1 debt in Europe, after the asset class was buffeted by serious headwinds during the summer months. Banks have not tapped the European AT1 market since a triple-tranche €3.5bn-equivalent deal from Deutsche Bank in mid-May, when demand for the product was still strong. However, since then, banks’ subordinated debt, and AT1 in particular, has been hit by volatility with cash prices yo-yoing five to six points from week to week. BPE was one of the victims and had to pull a transaction in early July. Meanwhile, the BES saga, which saw the bank’s subordinated debt left in the bad bank following its restructuring, acted as a reminder of the depth of losses to which investors can be exposed, while the lack of secondary liquidity amplified some of the movements. “The BES situation had a massive impact on the market initially but it has since recovered and has been able to compartmentalise the situation and it was not a point of contagion,” said a syndicate banker. “We have had three or four months of no supply and there is a lot of cash to be put to work.” Santander, rated Baa2/BBB/BBB+, mandated Credit Suisse, HSBC, JP Morgan, its own syndicate team, SG and UBS, and is expected to go first. The issuer is planning a one-day roadshow on Monday and execution is expected the following day. Meanwhile, UniCredit, rated Baa2/BBB/BBB+, which mandated Bank of America Merrill Lynch, CA-CIB, Credit Suisse, Deutsche Bank and UniCredit, will see investors over two days with pricing expected for Wednesday. “It’ll be certainly interesting to see how that will work,” another syndicate banker said. “It’s likely that the market is strong enough at present to take both deals, so we expect them to be complementary rather than competing.” Rarity value It will be UniCredit’s first euro-denominated AT1, following the launch of a US$1.25bn perpetual non-call 10-year deal that priced with an 8% coupon in March. “There is serious rarity value in Italy and I would expect UniCredit to benefit from that,” the banker said. UniCredit’s dollar issue is the only outstanding AT1 deal from an Italian bank. That transaction was quoted at a cash price of 105 on Friday, giving a 7.3% yield and spread of 495bp over swaps. Santander will not benefit from the same rarity value given two previous issues in the format, while BBVA has also tapped both dollars and euros. Santander’s euro note issue was priced at a yield of 6.25% and has tightened to 5.86%, or a cash price of 102. The May dollar bond, which was priced at 6.375%, has failed to perform so well, widening to 6.6% to trade at 99.30, according to Tradeweb. The new deal is expected to mirror the structure of the previous euro bond issue, a syndicate official said, with the same low trigger of 5.125% for conversion into equity. While UniCredit will have the same low 5.125% Common Equity Tier 1 trigger, it will have a temporary write-down structure – the first time that the two structures go head to head in the market. “It might be a test of what investors prefer in terms of loss absorption mechanism, but at the end of the day, technicals will dominate where the deals price, and they are very strong right now,” said the first syndicate banker.

In the covered bond space, National Australia Bank was the only show in town last week and quickly amassed a book nearing €500m for what was initially shown as a minimum €250m tap of its €750m 1.375% May 28 2021 covered deal at mid-swaps plus 10bp area.  This allowed leads Credit Agricole, NAB and UBS to fix the spread at plus 9bp and then the size at €500m. “This is such an impressive level for NAB to come at,” said a syndicate banker. “If you had told me even two months ago that an Australian bank would be able to price a near seven-year bond at plus 9bp I wouldn’t have believed you.” Bankers believe the combination of a lack of supply, the favourable liquidity coverage ratio treatment and a supportive backdrop helped the Australian lender. At the end of May, NAB priced the original bond, a €750m issue, at mid-swaps plus 26bp on the back of just €1bn of orders. At the time, market observers questioned the timing of the deal and thought the bank should have waited for a more supportive backdrop to sell what was its first European covered bond for about a year.

UBS was deluged with some €6.5bn of orders from 343 investors for a rare dual-tranche senior euro deal last Wednesday, as accounts begin hoarding unsecured debt for what could be a very quiet winter. The deal was the first term euro senior unsecured deal since RBS issued a €1bn five-year back in mid-June. And with the ECB’s TLTRO just around the corner, investors are expecting supply to stall in the European market, making deals a hot commodity. “Some €6.5bn of demand across our dual-tranche senior offer can’t only be driven by the fact that it was UBS’s first euro senior issue since January 2012,” said Armin Peter, head of European debt syndicate at UBS. “It’s more likely that people haven’t had the chance to buy much senior paper recently and because supply might be rather limited throughout second half of 2014 due to TLTRO.” The Swiss bank was the first lender out of the blocks, selling €3bn across a two-year FRN and a seven-year fixed-rate bond. Investors showed a clear preference for the seven-year portion, placing €4bn of orders, which allowed sole lead manager UBS to significantly tighten guidance from mid-swaps plus low 60s to 55bp–58bp (will price in range), and then to a final plus 55bp. “The seven-year looked pretty generous at the beginning but at the revised guidance it looks about right,” said a syndicate official. “I would have put fair value at about 50bp, so it’s about a 5bp new-issue premium.” The two-year floater was initially marketed at three-month Euribor plus 30bp area, which was revised to plus 25bp–27bp (will price in range) and then to plus 25bp on the back of €2.5bn of orders. At plus 25bp, one banker said the issuer offered no new-issue premium. Both deals were €1.5bn in size. On the floater, Germany took 33%, France 20%, the UK 11%, the Nordics 9%, Iberia 8%, Benelux 7%, Switzerland 6%, Italy 3% and others 3%. By account type, managed funds took 46%, banks 25%, insurance companies 14%, public entities 8%, private banks 5% and others 2%. On the seven-year fixed, Germany took 25%, the UK 21%, Benelux 15%, France 11%, the Nordics 11%, Switzerland 5%, Italy 3%, US offshore 3%, Iberia 2% and others 5%. By account type, managed funds took 55%, insurance companies 22%, banks 12%, public entities 5%, private banks 4% and others 2%.  Swiss Re and Sampo line up debuts Swiss Re Corporate Solutions, a subsidiary of Swiss Re Group, is looking to make its bond debut. It is seeking to access the US dollar Reg S market through a 30 non-call 10-year issue. Bank of America Merrill Lynch, BNP Paribas, Citigroup and RBC are arranging investors meetings in Switzerland and the UK starting Sept 1. “Swiss Re has sold loads of subordinated bond deals before but this is the first issue from this subsidiary,” said a syndicate banker. And in the senior market, September prospects for paper will be saved by Nordic group Sampo, which has mandated Citigroup, Deutsche Bank and Nordea Markets to arrange investor meetings in Europe ahead of a euro-denominated transaction. Sampo is rated Baa2 with a stable outlook by Moody’s.

Kommunalbanken Norway, rated Aaa/AAA, jumped on the primary issuance bandwagon last Friday, pricing a seven-year Reg S FRN amid mounting concerns about the conflict in Ukraine and Russia. The Norwegian issuer hired Bank of America Merrill Lynch, BNP Paribas and Goldman Sachs to market the deal at the three-month Libor plus 13bp area, having announced the issue on Thursday. “Considering the strength of the credit and the product, we were confident we could successfully sell this deal despite the market turning pretty ugly on Thursday,” said a syndicate official. Bankers kept books open until the US open, allowing a number of offshore US investors the chance to buy into the offering. The US$300m deal priced during the New York morning at plus 13bp.  “For core Europe the bid is still very strong and I think for the week ahead we’re likely to see issuers focusing on the short end of the curve in dollars,” the banker added. KBN is a regular borrower in the capital markets, and was last in the market in May, selling a five-year benchmark. The US$1bn 1.75% May 2019 Reg S/144A deal priced at 12bp over mid-swaps on the back of more than US$1.2bn of orders. KBN is owned 100% by the Kingdom of Norway and aims to raise US$20bn this year. Prior to this transaction, it had completed about 60% of its funding needs.

Participants remain at odds over the likelihood of full-blown quantitative easing in Europe and continue to debate whether it is currently priced into markets, but this did little to deter a swift rally across fixed income assets last week on the back of a dovish speech from Mario Draghi at Jackson Hole. Rates and credit roared back after a choppy August, which had also seen inflation expectations in the eurozone sink to a new low. But Draghi’s recent comments buoyed hopes of eurozone QE and were well received by investors, as yields on eurozone sovereign debt plumbed new depths. Ten-year German government bonds dipped below 0.9% and the spread to comparable Spanish bonds narrowed to 125bp from over 200bp earlier in the year. In credit, Markit’s iTraxx Main and Crossover indices ground in to 56bp and 230bp respectively – their tightest levels since early July – while the euro sank below 1.32 against the US dollar, its lowest level in a year. “There has been a substantial re-pricing following the QE discussion, which has erased fears of political risk or the Fed ending monetary easing. The market is currently willing to overlook negative news,” said Alberto Gallo, head of macro credit strategy at RBS. The rally marks quite a turnaround for eurozone markets, which had softened significantly since the end of July on the back of rising geopolitical tensions in Ukraine and the Middle East. Only last week, strategists were pointing to signs that investors were increasingly sceptical about Draghi’s ability to enact a wide-scale asset purchase scheme in the vein of the Fed, Bank of England and Bank of Japan. Euro inflation 5yr forward CPI (%) The euro inflation five-year forward – a measure the ECB is known to track – sank to a record low of 1.94% on August 20. The market’s expectation of inflation in five years’ time dipping below the ECB’s inflation target was interpreted by some analysts as the market cutting the probability of QE being enacted. “Draghi has always got a lot done with rhetoric he can’t do with the governing council. But when he said in July and August that the ECB is committed to the inflation target, the market response suggested it doubted he was credible. Inflation plumbed new depths and peripheral spreads widened from the narrows,” said Laurence Mutkin, head of interest rate strategy at BNP Paribas. Inflation forwards rose once more above 2% during last week’s market rally. Still, strategists say it is impossible to evaluate properly whether QE is fully priced in, given the uncertainty about what such a programme would look like. One strategist estimated that a €1trn QE programme on sovereigns would push euro-dollar below 1.30 and the spread between 10-year Spanish and Italian debt to within 100bp of Bunds. The market is now expectant ahead of next week’s ECB meeting, following disappointing August inflation data. JP Morgan strategists now predict the ECB to cut refi and deposit rates by 10bp and to tweak the TLTRO to make it more attractive. Deutsche Bank strategists said the ECB is unlikely to announce large-scale QE, but said the central bank would have to “ratchet up its rhetoric to validate Draghi’s speech”. “Quite a lot of QE is priced in because otherwise peripheral spreads would be wider. The problem for the eurozone is there are still lots of reasons not to do QE: the TLTRO, the AQR and the impact of negative interest rates in the medium term,” said BNPP’s Mutkin. “That’s why we changed our call on QE from a central case scenario to a tail risk. But as economic data have continued to surprise the ECB on the downside, the ’tail’ is not as far from the central case as it was.”

Nederlandse Waterschapsbank (NWB) finally priced a five-year dollar deal after a prolonged two-day execution process. Barclays was sole lead on the US$500m RegS/144a bond.    The lengthy bookbuilding, which began on Thursday morning, raised a few eyebrows. Many in the market thought the choice of one bank on the top line suggested there was an anchor order lined up to take the deal. “You have to wonder why NWB wouldn’t have hired more than one bank if they were going to distribute this deal around the market,” said one banker. “But still, at plus 9bp, this will be a very good level for the issuer.” The deal was initially marketed at the plus 9bp area, which is where it later priced, equivalent to 23.65bp over the five-year Treasury.  The seemingly lacklustre response to the issue was all the more surprising given the success of country peer BNG on Thursday, although that issue was sold in euros. BNG priced a €1bn September 2024 bond at mid-swaps plus 12bp on the back of €2bn of orders via Credit Agricole, Citigroup, HSBC and RBS. Barclays was unavailable for comment.

Dutch oil and gas company EBN returned to the Swiss market on Wednesday after two years, with a SFr300m dual-tranche bond. EBN, rated Aaa by Moody’s, mandated Credit Suisse and RBS to arrange the deal. Books opened at 9am with the issuer looking to raise a minimum of SFr125m per tranche, leaving a further SFr50m open depending on pricing and demand, one of the leads said. The books closed at SFr800m and were scaled back to SFr175m on the 0.5% eight-year tranche and to SFr125m on the 0.875% 12-year piece. The company’s top-quality status and good market timing secured investor interest, according to the banker, and meant the issuer was able to slightly tighten an already low spread by 1bp on the SFr125m September 2026 tranche to mid-swaps less 11bp. The SFr175m September 2022 tranche stayed at mid-swaps less 8bp. The coupons on both tranches mark record lows for a corporate borrower at their respective tenors, the banker said. EBN chose to issue eight- and 12-year tranches to fit its maturity profile and curve, he added. EBN’s previous deals were used as comparables to price the transaction, including its SFr150m October 2023s bid at less 9bp and its SFr125m July 2024s at less 8bp, according to the banker. One lead bank confirmed that for its allocation of the 2022 tranche, banks took the majority of the paper with 65%, asset managers 24% and insurance funds 11%. For the 12-year tranche, banks took 48%, pension funds 22%, insurance funds 16% and asset managers 14%.

The US Department of Justice has turned its attention to settlement talks with Goldman Sachs and Morgan Stanley over allegations that the investment banks knowingly packaged and sold problematic mortgage-backed products, according to sources with knowledge of the conversations. The talks come in the wake of the DoJ’s US$17bn settlement with Bank of America, the US$7bn settlement with Citigroup and the US$13bn settlement with JP Morgan. Morgan Stanley and Goldman Sachs are likely to agree to smaller settlements, however, given their smaller exposure and rapid response to sever ties with mortgage products after the crisis, including selling mortgage-servicing operations. A deal would close out investigations into the five big US investment banks. The likely fines for the banks should be less than US$4bn, according to one attorney following the settlements. Last week, Goldman reached a settlement with the Federal Housing Finance Agency, conservator for mortgage finance agencies Fannie Mae and Freddie Mac, and appeared primed to settle with the DoJ. Goldman agreed to repurchase residential mortgage-backed securities it sold to Fannie Mae and Freddie Mac between 2005 and 2007 for US$3.15bn. The FHFA has estimated the value of the settlement at US$1.2bn implying a value on the RMBS Goldman bought at US$1.95bn. The bank is fully reserved against the settlement. Earlier this year, Morgan Stanley settled up with the FHFA for US$1.25bn in connection with private-label mortgage-backed securities sold to Freddie and Fannie in the same period. JP Morgan agreed last year to pay US$4bn to settle similar claims. While JP Morgan was able to get credit for its FHFA settlement in its deal with the DoJ, Bank of America wasn’t able to get similar terms. The break JP Morgan got was tied to its role in saving Bear Stearns from collapse and buying Washington Mutual out of bankruptcy, according to sources. Morgan Stanley and Goldman will not likely get credit for settling with the FHFA either. The claims the DoJ is pressing under the Financial Institutions Reform, Recovery, and Enforcement Act, FIRREA, are distinct from the claims that were pressed by the FHFA. BofA Merrill’s precedent Morgan Stanley and Goldman are also walking into settlement talks with the DoJ after the nation’s top cop beat Bank of America in court in the FIRREA suit filed against Countrywide Financial. Last month, BofA Merrill was ordered to pay US$1.27bn after a jury found it liable for fraud late last year. The case showed the DoJ was prepared to litigate and proved it could win. That loss for BofA Merrill decreased the odds winning in court for the banks that had not settled. Separately, BofA Merrill asked a federal judge to throw out the verdict in that FIRREA case. As expected, the bank filed a motion arguing that the evidence presented at trial last year did not support the jury’s verdict and asked US District Judge Jed Rakoff to vacate the verdict as a matter of law or order a new trial. It is the first step in appealing the verdict. Rakoff is not expected to overturn the verdict. In fact, in his ruling ordering BofA Merrill to pay US$1.27bn, Rakoff called the Countrywide mortgage programme at the centre of the case a vehicle for brazen fraud from start to finish and said there was ample evidence of fraud. Both banks and the DoJ declined to comment.

FMS Wertmanagement, rated Aaa/AAA/AAA, was another beneficiary of heightened demand for safe assets last week when it received over US$4.1bn of orders for its fifth Global benchmark. The German agency priced a US$1.5bn three-year on Wednesday at mid-swaps minus 2bp, having initially tested interest at flat area via Citigroup, Credit Suisse, Goldman and HSBC. “This went very well and allowed the issuer to price the deal with an amazing coupon of just 1.125%,” said a syndicate official. Nearly 60 investors took part in the transaction, which priced 2bp back of KfW and 18.85bp over US Treasuries. FMS issues about €4bn a year in euros and the rest in US dollars and other foreign currencies. Overall funding for the agency is set to be €10bn this year. In terms of the distribution, the US took 40%, Asia 27%, the UK 15%, the Americas (excluding US) 6%, the Middle East and Africa 6%, other Europe 5% and others 1%. By account type, central banks and official institutions took 42%, fund and asset managers 26%, banks 24%, pension funds and insurance companies 7% and others 1%.