With the starting gun still ringing in their ears, banks came racing out of the blocks to take maximum advantage of the opening of the January issuance window, with fears of spread widening and volatility to come driving a surge in multi-format Yankee supply and a concentrated salvo of euro senior issuance.
The FIG market typically sees in each new year with a deluge of supply, but the strategies adopted by some big funders suggest an extra note of urgency this year. Many issuers share the view that 2022 will be a more difficult year than the last and funding costs are expected to rise, with rates rises and central bank tapering on the horizon and Covid-19-related uncertainty still a concern.
Even in an issuance window cut short by public holidays, many European banks launched back-to-back raids across currencies and in some cases took the relatively unusual step of launching multi-tranche subordinated and senior unsecured transactions.
"This is not something we have never seen before – we had a few situations like that last year – but it is quite telling that many issuers at the start of the year have decided to combine AT1 with senior preferred or Tier 2 with holdco, for instance," said a DCM banker.
"It is a clear indication that firstly issuers believe current levels are attractive ... and secondly that issuers want to limit the number of times they need to go to the market to complete their funding programme."
Credit Agricole, for example, wasted little time in launching the first Additional Tier 1 of the year on Tuesday, opening books for a 144A registered perpetual non-call September 2029 transaction. At the same time, it offered investors a five-year US dollar senior preferred tranche.
"In general, there is an expectation this year is not going to be an easy ride, so we have issuers being pragmatic and taking the market on early," said a banker close to the deal. "Looking at how much supply came in the US dollar market [on Monday] and how much is in the pipeline, why would you disassociate the two just because they are not in the same part of the capital structure?"
The AT1 priced at 4.75%, while the senior preferred landed at 65bp over Treasuries. Bankers said the approach had no drawbacks as it targeted two distinct groups of investors.
Similarly, on the same day, Deutsche Bank sealed a dual-tranche Tier 2 and senior non-preferred transaction while National Australia Bank raised US$4.75bn of Tier 2 and senior unsecured paper.
De-risking the focus
Much of last week's supply came from top-tier banks with large funding needs and was focused on subordinated or senior formats, with issuers prioritising their most important trades and looking to make early headway towards MREL-eligible issuance targets.
That led to repeat issuance from banks such as Credit Agricole, which followed its AT1/senior combo with a €1.75bn dual tranche SNP offering. Compatriot BNP Paribas printed a €1.5bn SNP on Tuesday and a US$1.25bn AT1 on Wednesday, before the two banks both tapped the Swiss franc market on Thursday.
UBS also notably raised US$4.3bn of holdco and opco senior paper before printing US$1.5bn of AT1.
The deep US dollar market is often the first port of call for issuers targeting size and for many is the cheapest to deliver, so it is little surprise the currency saw the bulk of last week's action. US dollar issuance from European banks alone reached US$16.75bn, up from US$9.5bn in the first full week of 2021 and the highest for an equivalent period in five years, according to IFR data.
In tandem, euro issuance rose year on year from €7.88bn to €13.25bn.
Issuers in the single currency also prioritised size over price in many cases, with the average tranche size coming in at €950m versus €788m in the first week of 2021.
"People are going for size if they can and going early if they can, which tells you something about these issuers' thinking," said a second DCM banker. "It's about de-risking a bit."
"The theme of our macro call is there'll be some shakiness in the first half of the year, with spreads widening, then arguably if our call holds we'll see a mean reversion with spreads tightening in the second half. But do you really want to sit and wait for that and take the risk of it not happening? If you don't, you should be de-risking your funding plan early."
Participants said the market had coped well with the surge of supply, with most new senior issues recovering to trade at or slightly inside reoffer on Friday, after hawkish signals from the Federal Reserve prompted some broader market volatility earlier in the week.
"The Fed wobble and equity correction didn't really have capacity to derail credit markets," said a syndicate banker. "As much as traders tried to call stuff wider it didn't stick there."
Further heavy supply is expected in the coming week, with the focus remaining on senior funding.
"I remain of the view that the cash overhang and redemption profile means these volumes, for the period we're going to see them, which is two or three weeks maximum, should be fine," said the syndicate banker.
