Disruption looms for Asian banks

Trading results surged globally in the first quarter, boosting the performance of banks that stayed with a universal approach and those that took a hatchet to trading operations. While JP Morgan, Goldman Sachs and Deutsche Bank were up 5%, 10% and 9% in fixed-income trading respectively, others that assiduously cut trade in risk-weighted assets – and left some businesses altogether – also turned in a strong quarter. UBS, for example, sharply trimmed its trading unit but saw revenues from sales and trading surge by 71%. Most other European banks that reported results last week, such as Commerzbank, Credit Agricole and Natixis, also produced outsized returns in this area (see reports on page 14). Most of them have cut their balance sheets too. Which raises the question: If banks can achieve outsized results with less risk – holding fewer assets and taking smaller capital surcharges – will the big universal institutions feel pressure to pare back trading? Not likely, argues Dick Bove, a bank analyst at Rafferty Capital, who believes the strong first quarter could mark the beginning of a five-year cycle for trading. “We are not going back to 2006–07 levels of activity,” Bove told IFR. “But we are coming off the bottom, because there’s a reason to do more trading in nearly every product.” He says that, rather than cut, banks will come up with the level of risk-weighted assets they need to stay in the game – because when cycles are strong, the game is very profitable. Shifting focus For the biggest players, that will mean shifting balance sheet risk in a way that allows more money to be diverted into trading without necessarily driving up RWAs. That should not be a problem for US outfits such as Morgan Stanley, which has made a real show of cutting RWAs. But European banks could be facing real constraints that may limit their ability to accelerate into a new trading cycle at full throttle, even if they were so inclined. “Banks are getting better at making money from lower VaR levels,” said Seb Walker, managing director at analysis firm Tricumen. He said data showed that, after discounting for execution methods and volume changes, banks improved revenue/VaR ratios by two to three times in key fixed-income products last year compared with 2011. “It is not as simple as saying that a bank cut RWAs and still performed well” But there is still considerable “regulatory change risk” for European banks, Walker said. Europe has yet to implement its swap execution facility rules, for example. How these are implemented could cause further ruptures to the fixed-income market, Walker said. Beyond that, he said, individual banks had their own pressure points. For some, that is RWAs, for others, it is leverage. And for others, it is the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) stress test that drives their view of trading. How the banks approach each individual trading product matters more than overall RWAs, Walker said. “It is not as simple as saying [that] a bank cut RWAs and still performed well,” he said. Keeping steady In fact, rather than broadening out, most banks will stay on their current course, in spite of how the market turns. Fitch Ratings says that, although the banks with a narrower focus did well in the first quarter, it believes the banks with the universal model took overall market share. Fitch calculates that volatility in currencies, commodities and equities drove a 48% quarter-on-quarter increase in capital markets revenues for the five largest US banks. And firms with larger macro platforms benefited most. That trend could continue as volatility continues to boost trading and margins this year. Overall trading revenue is less than in 2011 and probably will not expand that much, according to Walker. But the banks with universal platforms are still well-positioned to increase market share at the expense of those that have exited product lines. A new cycle could, however, bring new entrants, Walker said.

Derivatives proved to be an important driver behind a 20% year-on-year jump in equity sales and trading revenue for the top 10 dealers during the first quarter as investors embraced alternative yield enhancement opportunities against a backdrop of ever-declining interest rates, while cross-border activity was reignited by divergent central bank policies. While previous years have seen houses struggle to maintain the momentum of a strong first quarter, dealers believe that 2015 could be different. “There’s always some seasonality, but the outlook remains strong even though some say that equity markets look toppish,” said Rui Fernandes, head of equity and fund derivatives structuring at JP Morgan. “As long as you believe that volatility will continue, the growth in revenues from equity derivatives should continue too.” Concentration increased at the top with Goldman Sachs, Morgan Stanley and JP Morgan posting equity revenue gains of 46%, 35% and 24% respectively, while those battling for a place among the leaders stalled; Bank of America Merrill Lynch and Citigroup posted marginal revenue declines in the business. “This was a quarter where scale mattered,” said Fernandes. ”We saw performance across flow, corporate, exotics, structured products and cash. If you’re not strong across all of those areas, it can be more of a struggle.” The value of breadth was also felt in Europe, where Deutsche Bank posted equity revenues of €1bn – a 30% year-on-year increase. The firm is now eyeing a top-five equity sales and trading position by 2020, with equity derivatives a key driver given the relatively low leverage exposure relative to fixed income operations under CRD IV. “The key to future success in the equity derivative business will be to have a well diversified platform, both in terms of global reach and breadth of distribution channel, integrated by a common and scalable risk platform,” said Thomas Patrick, head of global equity derivatives at Deutsche. January’s volatility surge, with the VIX spiking above 20 on a number of occasions, threw a lifeline to struggling flow businesses. Analysis from research firm Tricumen shows that US flow derivatives were a big driver of equity revenue growth, while Asia-Pacific was also solid, apart from South Korea, which suffered a sharp decline. “The flow business continues to increase in terms of number of clients and we see more diversified demand,” said David Escoffier, deputy head of global markets at SG. “But at the same time, pricing has become more complex and liquidity is lower.” European flows provided a big boost as the ECB’s €1.1bn stimulus package reignited demand for European equity access, particularly from US investors who had largely retrenched through 2014. The EuroStoxx 50 gained 18% in the first quarter, compared with a little-changed S&P 500. That shift that was reflected in the listed options market, with put and call volumes on European indices gaining around 20% year-on-year while US activity was largely flat. “There has been general appetite for access to Europe in an FX-hedged way. Anything multi-asset that touches FX and equities has been a big theme,” said Aleksander Ivanovic, co-head of European derivative sales at Morgan Stanley. Demand for European equities in dollar-hedged, or “quanto” format caused Eurodollar and the EuroStoxx 50 to move in opposite directions and sending correlation between the two to historic lows (See “Correlation positions mount on quanto equity rush”, IFR 2074 p64). Re-equitisation With the ECB snapping up €60bn of bonds each month under its QE programme, more than 80% of euro-denominated fixed income now yields less than 1%, according to Citigroup credit analysts. As such, the long-awaited rotation from fixed income to equities may finally be gaining some traction, although it is expected to be a very long-term trend. “We believe that the cycles we have entered into are very long term, and the search for yield is driving an amazing shift in

A new breed of secured bonds could soon see the light of day if European regulators embrace a proposal put forward by the European Covered Bond Council and backed by the IMF last week. Answering the European Commission’s consultation on a Capital Market Union, the ECBC has laid out its plan to create a new instrument backed by SME collateral and possibly other assets linked to the real economy, as previously reported by IFR. The plan looks to combine covered bond and securitisation features to make better use of collateral whose potential has not been maximised in the two separate formats, and tackle both the real economy’s and the capital markets’ needs, the ECBC and the IMF said. The new vehicle, called European Secured Notes (ESN), would offer dual recourse to a cover pool and to the issuer in case of financial difficulty, as well as tranching of credit risk and, potentially, off-balance sheet treatment to free-up space for more lending, the ECBC said. And market participants say the time is ripe for a new type of secured product. “It seems like a very strong proposal coming at the right timing,” said Lucette Yvernault, fixed-income fund manager at Schroders. Extremely low yields, driven by ECB purchase schemes, on banks’ typical safe-haven portfolios of government and covered bonds have paved the way for higher risk/higher premium offerings. Issuers have generally steered clear of SME collateral as it has proved expensive to securitise in any significant volume since the crisis and too risky to convince traditional covered bond investors. From their point of view, using SME loans as collateral could somehow dilute the quality of a well-established formula, said Daniel Loughney, global rates and currency portfolio manager at AllianceBernstein. “Covered bonds are essentially bonds that are backed by low risk and/or long term assets. SME loans are much shorter term, and are arguably much more tied to economic cycles than mortgage and public-sector loans,” he said. However, in analysts’ notes BBVA said options would be explored. “More secured funding instruments in addition to covered bonds will emerge, given the latter’s limitations on their [type of] underlying eligible collateral,” it said. SMEs, which represent about €3.7trn of Europe’s GDP according to the ECBC and more than 70% of the economy in Italy, Spain and Portugal, according to IMF figures, have become the focus of policymakers and central banks trying to spur the region’s growth and alleviate the regulatory burden on financing – with the Commission putting them at the core of its CMU proposal. “We have a strong conviction that the CMU initiative will redefine the banks’ lending business,” the analysts said. Widening the investor base for SME products would be one of the key objectives in that direction, they added. SME loans are challenging to pool into marketable bonds as they have shorter durations and require higher credit enhancement and overcollateralisation than mortgages. However, they earn higher yields, which will push banks to expand their SME loan books, Yvernault said. “Banks still have to tightly match capital and comply with leverage limits, so they will not go back to old times’ lending levels, but this is the only segment where they can still get decent margins,” she said. A twist on covereds and ABS The ECBC says the new instrument, combining the safety net of dual recourse with solid transparency requirements on the underlying assets, should convince regulators to grant it favourably treatment under liquidity and capital rules. It would need to be based on a pan-European template, including eligibility criteria, risk parameters and data disclosure. The ECB’s existing collateral framework could be a good template for an harmonised definition of eligible SME assets, the ECBC said. In practice, the product could take two forms: an on-balance sheet product backed by a dynamic pool, with clear overcollateralisation requirements, or an off-balance

I’M PUZZLED. I detected a fair degree of fear, uncertainty and even a bit of loathing in the Joint Committee of the European Supervisory Authorities’ (ESA) latest “Report on Risks and Vulnerabilities in the EU Financial System”. Why the puzzlement? Because beyond the cyclical macro factors that are out there, that fear and uncertainty is based on the self-same, and not-so-cyclical, initiatives that the regulatory machine has itself instigated to save us all from systemic risk and taxpayer bailouts and to open up and diversify channels of finance to the real-economy. What’s been the impact of the regulatory and supervisory combat manoeuvres that have been centred on the financial sector for several years now? Broadly negative, I’d say. Have policymakers facilitated the creation of an institutional framework that’s better suited to the realities of the New World? Not really. In fact, in some respects, regulatory initiatives are doing little more than painfully and slowly strangling the industry into submission. But the ESA – an umbrella group of the EBA, EIOPA and ESMA – crows that the alphabet soup of policy and regulatory initiatives – BRRD, CMU, CRD IV/CRR, DGS, EMIR, LCR, MiFID II/MiFIR, NSFR, PRIPS, Solvency II – is “contributing to improving the stability and confidence in the financial system as well as facilitating additional funding channels to the real economy”. That’s debatable at best, in my view. And by the way I would certainly want our supervisory overlords to have wanted to have done better than “contribute to” stability. But then, confusingly, the supervisors go on to tell us the main risks to market stability have in fact intensified in the past six months and the main risks affecting the financial system have become more entrenched. Put another way, policy and regulatory initiatives are NOT contributing to improving the stability and confidence in the financial system. SUPERVISORS HAVE THE gall to question the viability of banks’ business models. “Expectations are that some banks will need to further change their business models towards those which have proved successful, once the regulatory framework has been implemented,” was their priceless comment. Shifting your business model to a successful one? Seriously? That’s where the armies of banking consultants and strategists have clearly been going wrong… Let’s be clear here: it’s the actions of policymakers, regulators and their central banking brethren that have egregiously distorted financial markets, changed the rules of the game in a way that unnecessarily renders a lot of banking business uneconomic thereby undermining profitability, and forced a lurch for yield that is leading to the creation of asset bubbles. “… investment flows attracted to overheating asset market segments distort funding flows to the real economy and impede future economic prospects,” we’re told. Yup. “Supervisors should assess and, when needed, challenge the changes to business models of financial institutions to ensure that these changes do not materially impede with the provision of financial services or associated economic growth impulses”, the ESA says. Wrong! They should leave business models to the banks and focus on implementing a supervisory framework that helps rather than hinders the provision of cost-effective and innovative client-focused financial services. Reading and optimising the interplay between economic, business and monetary cycles is what banks do. But much more perplexing is making sense of the interplay between the cycles and the strategic repositioning banks are being forced to undertake to deal with the regulatory and supervisory cycle the ESA constituents and others have unleashed on an unsuspecting world. That is just one of many unintended consequences of ill thought-out regulation SUPERVISORS ALSO HAD the bare-faced audacity to attribute the destruction of bond market liquidity and the withdrawal of market-makers to “structural reasons”. Are they seriou

Negative Libor rates could make investment-grade lending even less profitable, or even free, as banks try to resist borrowers’ requests to strip out zero Libor floors from loan documents, which raises the bizarre theoretical possibility that banks could have to pay borrowers to lend. Zero Libor floors are included in standard loan documents that were introduced by the Loan Market Association in 2012, and ensure that loan margins are never eroded by negative Libor rates. Negative Libor rates on currencies including the euro, Swiss franc, Swedish krona and Danish krone are already being deducted from interest margins on existing loans without Libor floors, bankers said, bringing losses for banks where negative Libor rates exceed margins. “The result will be that the interest rate will be less than the margin. The negative Libor will have the effect of eroding the margin,” Clifford Chance said in a briefing note in February. Some top companies are, however, pushing to have zero Libor floors removed from loan documentation on new loans that are currently being negotiated. This could reduce margins or wipe them out altogether if loans are drawn, potentially causing losses for banks, depending on their funding cost level. Three-month Euribor dipped below zero on April 21 and is currently less than –1bp, but negative Libor rates are far wider on other currencies. The gap is greatest on Swiss franc Libor, which has been negative since the start of the year and was –79.3bp on May 7. Copenhagen’s three-month interbank offered rate Cibor has been negative since the end of January and was –17.25bp on May 7, while Stockholm interbank offered rate Stibor has been negative since mid-February and was –19bp on May 7. Negative Libor rates are only an issue on drawn loans. Most European companies have standby multicurrency revolving credits in place that are designed to remain undrawn but can potentially be drawn. Some companies also have term loans, which are drawn. Free money Although most existing loans have zero Libor floors thanks to the Loan Market Association standard documentation, discussions are currently taking place with top companies that are trying to remove them. Although this would mean that companies could technically borrow for free, they would have to weigh up the cost of damaging relationships with their banks. “Any borrower who strips out the floor on their revolving credit facility and then draws down does not understand the concept of relationship banking,” a loan banker said. The prospect of negative Libor rates eating into already razor-fine margins paid by top companies is alarming banks, as syndicated lending is already a loss-leader for other, more lucrative forms of business and banks are under pressure from shareholders to show returns on equity. Switzerland’s Nestle already pays one of the lowest interest margins in the EMEA loan market. The company pays undrawn commitment fees of 1bp and 3.75bp and margins of 10bp and 12.5bp on one-year and five-year loans that are part of an existing €11bn revolving credit that was signed in October 2013. If Nestle were to remove the zero Libor floor and draw down on its loan in Swiss francs, the negative Libor yield on the Swiss franc of -79.3bp would mean that banks had a negative interest rate of 67bp–69bp on Nestle’s loan. Although overall interest rates could be negative, lenders are unlikely to be required to make payments to borrowers, according to Clifford Chance. Loan Market Association documentation does not provide for the payment of interest by the borrower to the lenders, and banks’ back office systems were not set up to deal with this eventuality. Companies could, however, theoretically borrow for free, which would still be painful for banks depending on their funding costs. The issue could create greater demand for currencies with negative Libor rates under existing multicurrency loan agreements, which could prompt banks to limit draw-downs in those currencies. Pot

Apple, Shell and AbbVie blitzed the US bond market last week with a combined US$34bn of jumbo bond deals in just two days, bringing the week’s tally to US$52bn, the fourth-largest of all time. AbbVie issued US$16.7bn to finance its acquisition of Pharmacyclics – it was the sixth-biggest bond deal ever – after attracting US$60bn of demand. The next day Apple issued US$8bn on US$21bn of demand and Shell US$10bn on US$23bn of orders. But bankers are warning borrowers planning to raise some US$80bn or more in May not to be dazzled by the US market’s seeming resilience. New-issue concessions have bulged in the past week after wild swings in 10 and 30-year Treasuries and huge supply took their toll. Now there are fears that the bond market has reached a tipping point, and corporates may face rising funding costs from here on. “The real risk to the market over the course of a busy May for new issues is extreme volatility in Treasuries,” said Jonny Fine, head of investment-grade debt syndicate in the Americas at Goldman Sachs. “We have gone from new-issue concessions of zero to 5bp in March to a weaker environment where NICs are 10bp–15bp. In the same period credit spreads have widened a little and Treasuries have increased a lot, so all-in costs of debt issuance have deteriorated.” The new-issue market has been able to recover from temporary gluts at various times this year. And, in the absence of Treasury volatility, it only took a few slow weeks to bring concessions snapping back in. “The real risk to the market over the course of a busy May for new issues is extreme volatility in Treasuries” Now, although investors still have cash to put to work, not knowing where rates are heading requires higher concessions, especially at the long end of the curve. It was no coincidence, then, that Apple paid 10bp in NICs and Shell 11bp–16bp on the day the 30-year Treasury yield pierced the 3% mark for the first time since December. Fundamental With European government bonds backing up dramatically, commodity prices stabilising and US economic growth expected to improve, some think the Treasury market is undergoing a fundamental shift away from curve flattening, towards a period of steepening at the long end. “Many former entrenched [bull] trends are now over and the new long-term [bear] trends have begun,” said William O’Donnell, head of US Treasury strategy at Royal Bank of Scotland. ”We are going through the earliest phase of a ‘term-risk tantrum’. What we have witnessed since the end of March is markets coming to grips with ongoing improvement in the US economy and maybe a nascent recovery out of Europe at a time when we are staring at record low European and US yields. It’s making people have a complete re-think.” Fed Chair Janet Yellen also made comments during the week that bolstered that view. “She sent a signal to the market that stocks have gone too high and bond yields are too low at a time when the Fed could raise rates in September,” said O’Donnell. Although yields tightened on Thursday, the wild swings saw issuers such as Anglo American pay new-issue premiums of as much as 19bp and most other borrowers that day paid double-digit concessions across maturities. Illiquid Matters will be made worse by the illiquidity in the secondary market. “Larger new-issue premiums impact future bond pricing to a greater extent than we have seen in the past, due to the illiquidity in the secondary market,” said Michael Shapiro, manager on Societe Generale’s US bond syndicate. “The existing secondary curve can widen because of a larger new-issue premium and the result is wider pricing points when an issuer or one of its peers seeks to return to the market.” Borrowers are also likely to find that they can no longer determine what they will pay in the bond market based on what others are achieving. “There have been times when the concessions that various credits in different sectors paid have been uniform, but this is not one of those environments,” sa

Rising volatility forced China Water Affairs to cancel its share placement last week, becoming the first to pull a follow-on offering in Hong Kong since the city’s stock market rally began in mid-April. China Water launched the placement of new shares last Tuesday, targeting up to HK$805m (US$104m) on a challenging day amid heavy sell-offs in Hong Kong and China stocks. The Shanghai market plummeted 4.06% for its biggest loss in nearly four months, with more IPOs coming to market and media reports that some Chinese brokerages had tightened their margin-financing requirements. The Hang Seng Index fell 1.31%, in keeping with the slump in Shanghai. China Water pressed ahead, despite such big drops, but its sale was always destined to be difficult. The 177m shares were marketed at an indicative price range of HK$4.38–$4.55 each or at a discount of 6.0%–9.5% to the pre-deal spot. The follow-on was pulled the following morning. A source close to the deal said the follow-on could have gone ahead, but that the company had decided not to proceed at the terms available. “They may have got a barely covered book. Full allocation to each investor will mean a disastrous aftermarket performance as they will dump the shares they don’t want,” said a banker away from the transaction. Wider discount The failure of CWA’s placement shows investors want better pricing when market volatility increases. “To launch a deal in a company like CWA, a name that investors are unfamiliar with, on a bad day, they need at least a double-digit discount,” said another banker away from the deal. As of last Thursday, the Hong Kong stock market had fallen 4.55% since touching a seven-year high of 28,588.52 on April 27. “Many small and mid-sized issuers are looking to tap the market for funds in the bull run. However, the time when sellers or issuers can sell shares at whatever prices they want has passed already,” said the banker. “There will be more ups and downs in the markets. The discount of blocks will have to be – and will continue to be – wider.” Third failure CWA’s offering was the third Hong Kong-listed equity transaction to be pulled in a month, showing that companies do not always have things their own way. In early April, oil company Brightoil Petroleum cancelled a HK$777m top-up placement after an anchor investor cut its order after the books closed. Brightoil returned with a bigger deal of HK$1.3bn last Thursday. The offer price was lower and the discount was wider than that on the last attempt. The first time round, the company had offered to sell shares at a discount of up to 10.6%, while last Thursday’s trade was settled at a discount of 12.4%. Late last month, a HK$640m block in Luye Pharma was pulled after the vendor, Citic Private Equity, decided not to sell for internal reasons. Citic Private Equity decided not to press ahead with the deal as CLSA, a unit of Citic, was not included in the syndicate, sources familiar with the situation said. Morgan Stanley and UBS had been joint bookrunners. The proceeds of the CWA follow-on had been due to be used to support the company’s future selective acquisitions of water-supply and waste-water treatment assets, as well as for general corporate purposes. Goldman Sachs was sole bookrunner.

Tesco Personal Finance printed its second public credit card ABS last week, having to deal with investor uneasiness about the UK retail group that posted a record loss only last month and a steady supply of other high-coupon UK ABS deals. This was on top of widening spreads in the secondary market for its existing bonds. Operating through Tesco bank, the issuer is using the public bond market to repay some of its drawings from the Bank of England’s Funding for Lending Scheme. This latest trade was £300m in size. “This issue represents a continuation of our planned repayment of FLS drawings. It is a smaller deal than the £500m we raised last year as we have increased our retail deposits,” said Ed Hughes, head of capital management and securitisation at Tesco Bank. The bank’s results show deposits up 13.7% to £6.9bn to the year ending February 2015, and a reduction in FLS drawings to £1.29bn to collateralise £789m of drawings. The previous year it pledged £1.6bn of credit card ABS for £1.096bn – it had retained a £1.75bn deal in 2013. These numbers show that while the FLS offered cheap funding (the original scheme charges started at 25bp), it came at a cost through haircuts on the amount of bonds pledged. Tesco’s first public offering included 2.9-year and 4.9-year bonds with legal finals in 2019 and 2021. And with its new Delamare Cards MTN Issuer 2015-1, it slotted in the middle of those. “We chose a three-year maturity to sit between the three- and five-year tranches of our transaction from last year, giving us final maturities in consecutive years,” said Hughes. Market conditions have changed noticeably since the last trade, however. The launch of the ECB’s purchase plan dragged spreads tighter – even for ineligible asset classes – which enabled a number of higher-yielding UK transactions such as UK non-conforming and buy-to-let RMBS to refinance legacy portfolios. But this increase in supply has led to the buyside being more demanding. “The level of supply is putting power back in investors’ hands,” said one syndicate banker away from the deal, adding that this was pulling spreads wider. “We have seen a lot of sterling non-conforming supply recently carrying higher coupons, which we suspect had some impact on price expectations,” said Hughes. Last year’s tranches printed at 45bp and 65bp, and were quoted up to 10bp back of those levels in a weak market as leads Bank of America Merrill Lynch and Citigroup (arranger) discussed pricing levels for the new trade with investors. This led to price thoughts of the 65bp area, to sit somewhere between the 2014-1 Class A1 and A2 notes. A weaker market backdrop did not help the trade, as was the fact that the transaction was marketed two weeks after Tesco announced a record £6.4bn loss. Its problems first hit the headlines last September when it said profits had been overstated, which prompted an inquiry from the Financial Reporting Council. This played on the minds of some buyers, even though this is a securitisation of a clean portfolio. “The [Tesco plc] results did come up in investor conversations, but given that Tesco Bank is offering secured notes backed by customer credit card assets as a stand-alone bank investors were happy with the credit quality of the Delamare trust, which sits alongside the best in the UK,” Hughes said. This is reflected in the credit enhancement, with requires a lower 11.11% versus 17% in Lloyds’ Penarth. And according to Fitch, the charge-off rate of 2.8% in Q4 2014 was almost half the agency’s base case assumption of 5%. The Delamare portfolio also had a lower charge-off rate than Lloyds’ Penarth, RBS’s Aran and NewDay’s programmes in Q4 2014. And even though investors can drill down through the portfolio to assess the quality, some buyer groups are still reticent due to the regulatory influences in the sector. “There is still some uncertainty around the LCR rules which affects demand from bank treasuries. The LCR drafting for ‘high-quality’ securitisa

The rates market was front and centre of some vicious price action last week, with yields on sovereign paper see-sawing on a minute-by-minute basis. But those who feared the credit sector would be crushed by the volatility later proved to be wide of the mark, with spreads maintaining a level of balance that bodes well for the primary market. Absolute yields will naturally be higher, although the margins paid over benchmarks will not ratchet out to unrealistic levels. “In terms of rates versus credit, the credit component of the equation has held in well,” said Vinod Vasan, global head of FIG, CMTS, at Deutsche Bank, who recently took on joint responsibility for co-ordinating the bank’s debt origination activities. “The rates aspect was always going to have an effect, but we’ve really only seen spreads move out marginally.” Markit’s iTraax Main index opened the London week at 60.625bp and was at 62bp on Friday, registering a high of 67bp and a low of 60bp along the way. For their part, European sovereign bond markets were flattened under the weight of rocketing – and then retrenching – yields, with US Treasuries moving in the same direction, albeit in a more measured manner. Each day seemed to bring fresh carnage, with prices whipsawing multiple points at a time. To put this in context, a one-point move on a €100m position is worth €10m – and bonds were moving around far more than that with alarming regularity, not to mention speed. The absolute numbers make for stark reading. As the May Day holiday week began, 10-year Bunds were yielding 0.15%, while BTPs and Bonos were around the 1.30% mark. Shortly after London traders had returned to their desks following their long weekend break, those yields were at 0.59% and 1.90%. “Things had been stretched too far, but the journey to yields more commensurate with reality was always going to be a bumpy ride” It did not stop there, with Bunds hitting 0.80% on Thursday morning at breakneck speed, while Italy and Spain broke through the 2% level. Most points between the highs and lows were revisited numerous times, offering traders multiple opportunities to top and tail themselves. By Friday morning, the levels were at 0.53% and 1.70%, although no one was counting on any sense of stability. Rational? The rationale for the moves was difficult to pinpoint, not least because it was not necessarily rational. There had been a widespread feeling, however, that things had gone too far, with the ECB QE effect being overplayed by traders who persuaded themselves that there would always be a buyer – somewhere – at a tighter level. “Real yields had got too low. The economic news out of Europe is positive, both in terms of growth and inflation, and prices are now more in line with where value should be,” said Demetrio Salorio, global head of DCM at SG CIB. “Things had been stretched too far, but the journey to yields [that are] more commensurate with reality was always going to be a bumpy ride.” “The fact is that it’s a technical market at the moment,” said Vasan. “Any pieces of technical information are seized upon, be that growth or inflation – or at least not deflation – and what effect that might have on the ECB’s programme.” In terms of the credit market, he highlighted bank Additional Tier 1 bonds as being the highest beta instruments with the greatest credit component, pointing out that they had proved remarkably resilient (on a case-by-case basis) in the face of the turmoil elsewhere. In fact, 10-year senior paper endured a rougher ride, although there was scant selling pressure noted. New issue flow in Europe was predictably slow given the volatility, with a number of credits holding off on deals in the hope of future stability. In the US, however, where 10-year Treasury yields ranged between 2.14% and 2.30%, just three borrowers – AbbVie, Apple and Shell – raised the best part of US$25bn between them as investment-grade volume cruised through the US$50bn mark. For the most part, new-issue co

An allocation heavily skewed towards long-only investors appears to have helped debutant Sixt Leasing through a difficult trading session in Frankfurt on Thursday, allowing the shares to emerge from an equity market sell-off relatively unscathed. The company placed 5.586m new shares at €20 per share, alongside a sale of 5.167m existing shares provided by parent Sixt. The shares represent 52% of the post-money share capital and the pricing values the leasing unit at €412m. The selling shareholder is providing 1.61m shares for a greenshoe that could increase the free-float to 60%, although some trading below the issue price on the first day of trading pattern means a portion of the shoe may have been used up. The offering was multiple times covered and there were around 250 institutional subscriptions for shares, but only around 40% of the orders were allocated. About a third of the interest originated locally, with a similar amount coming from the UK. US-based investors accounted for around 10% of the orders. Of those allocated, two-thirds were traditional long-onlys, with another 17% going to private wealth investors managed by the banking syndicate. Hedge funds accounted for around 17% of allocations and 3.3% was set aside for a retail tranche. The pricing implies a 2015 P/E ratio of around 18 times, which locates the shares at a 20% discount to local peer Grenkeleasing, but at a slight premium to a broader international peer group that includes Ryder. The company intends to use the primary proceeds to reduce its current debt load in order to strengthen its capital base, creating the financial leeway for growth. The shares opened at €20.40 and fell to an intra-day low of €19.87, but were back up to €20.405 by the close before rising to €21.695 at Friday’s close. Berenberg and Commerzbank were joint global co-ordinators and bookrunners alongside Baader.

While UBS has greatly reduced its foreign exchange, rates and credit unit, that business was the main driver of increased profits in the first quarter. The unit’s income surged by 71%, compared with the same period last year, to SFr701m. Meanwhile, the bank’s far larger equities trading unit could only manage a 15% rise in income to SFr1.16bn. That was weaker than many of its peers that boosted business here. UBS’s primary businesses, which it has been trying to emphasise in its leaner reincarnation, disappointed, seeing revenues rise just 4% year-on-year to SFr801m across its corporate client solutions division, which incorporates advisory and debt and equity capital markets. ECM was a strong point in this suite. Fees here went up 56% to SFr306m. One of the highlights was the €7.5bn capital increase by Santander, through Europe’s largest-ever accelerated bookbuild, run by UBS days after the Spanish bank’s new chief executive Ana Botin took over in January. DCM struggled in comparison, seeing fees fall by more than half to SFr143m. Advisory, always a lumpy business, fared little better, only garnering SFr172m in the quarter, down 29% year-on-year. The franchise has concentrated on leverage deals in the past. There have been fewer of these lately. Overall investment banking income rose by 22% to SFr2.67bn. UBS kept a disciplined eye on costs, with personnel expenses up only 9% year-on-year to SFr1.29bn. That meant overall pre-tax operating profits rose by 82% to SFr774m while the return on equity doubled to a staggering 42.4%. “The investment bank deserves applause, not only for its excellent performance but also because the results were delivered without increasing our risk profile, and while remaining within the allocated resource limits,” said Sergio Ermotti, chief executive. UBS attributed this to the fact that the bank had already cut its credit and rates trading book, meaning that it could still benefit from flow business during volatile periods without having massive amounts of risk on the table. That produces outsize returns. “Our new model is paying off. We run rates and credit in a restructured manner to manage client flow and high volatility periods to maximise revenues from it. The team is very focused, and that combined with technology gives us lots of options,” said a senior executive. UBS is the biggest provider of Swiss franc pairs, so the dramatic moves in the currency in January – when the euro exchange rate cap was removed – prompted many clients to rearrange these agreements. The executive cautioned against annualising the exceptional return on equity, saying the bank was still targeting an RoE of greater than 15% for the full year. He said the key was capital strength it had built up ahead of its peers, giving it more flexibility to operate now. Analysts agreed. “We believe UBS will emerge as a long-term winner among the banks. In particular, its recognition of the structural changes in the industry and focus on leverage make it well positioned to benefit from trends in the industry,” said James Chappell, analyst at Berenberg. During the quarter the bank’s leverage ratio increased by 50bp to 4.6%, significantly higher than peers. The bank also said its discussions with the US Department of Justice regarding FX misdemeanours were “at an advanced stage”. A settlement is expected in the next two months.

Sponsors are pressing for more aggressive terms on European leveraged loans, taking advantage of changing market conditions to force through concessions to documents during repricings. German ceramics company CeramTec kicked off the recent repricing wave in Europe in April, managing to shave 50bp off a euro term loan to 325bp over Euribor with a 1% floor. While investors agreed pricing was tight, 100% of lenders opted to retain their exposure in the credit, accepting that pricing has tightened in a market plagued by plentiful liquidity and few deals. With a bleak LBO pipeline, repricings are expected to continue and are likely to seek even more aggressive terms. The most recent repricing for CVC Capital Partners’ French rail equipment maker Delachaux also loosened restrictions on dividend payments as well as lowering spreads. “If you are a sponsor or sponsor’s lawyer, you would be thinking now, while you are doing a repricing, why not just do a bit more?” a loan banker said. Delachaux revised its repricing and tightened terms after strong support for the deal. The euro tranche, which was increased by €70m to €405m, will be cut by 50bp to 375bp over Euribor at par from initial guidance of 400bp. The dollar tranche, which was decreased by €70m-equivalent to US$250m, will be reduced by 75bp to 350bp over Libor, the tighter end of initial guidance. The dollar tranche is offered at par, with a 1% floor and reinstated 101 soft call protection for six months. In addition, the ability to take dividends was loosened to enable a payment if leverage is five times, up from 4.25 times. The deal was initially looking to loosen it to 4.75 times. In addition to cutting pricing and loosening dividend language, sponsors are trying to strip out covenants and make it easier to raise additional debt and make acquisitions, in a bid to try and bring debt on existing portfolio companies in line with new deals they can arrange in the market. “There has been a resetting of Europe’s leveraged loan market. The adjusted terms on dividends and covenants among other things are what you would get if you raise a new deal right now, so why not ask for them on an existing deal?” a second loan banker said. Get it while you can Borrowers are maximising the window of opportunity as new deals appear few and far between and potential repricings are predicted for a number of companies including German packaging group Mauser, which was sold to private equity firm Clayton Dubilier & Rice last year, and Luxembourg-based ink and pigment firm Flint, which was acquired by Koch Industries and Goldman Sachs’ private equity last year. Some bankers are even approaching borrowers and pitching to reprice leveraged loans raised earlier this year. “If a credit is doing really well, there is no way it should be paying 450bp with so much liquidity and so little deal flow,” a third loan banker said. Lenders that were in the market pre-2007 are raising concerns over what they see as a potential return to more risky practises on some leveraged deals. “Some feel we are back in situation like pre-2007 and it is even more alarming because docs are much weaker than they were back then. It is rubbish when people say banks’ credit acumen has been heightened by what they experienced pre-2007 as we are back at it. It is quite depressing, history is repeating itself,” the third banker said. Once some new deals come to the market, borrowers are likely to stop focusing on repricings, something which will come as a relief to bankers, which make very little fees on these deals and are unpopular among fund managers. “A borrower will look to get whatever they can get, but at some point the market will start saying no to repricings and document changes,” the first loan banker said.