KBC shows primary 'still alive' with defensive holdco

5 min read

KBC Group proved the primary market is still alive and kicking even amid a renewed sell-off on Wednesday as it tapped strong demand for short-dated senior paper from top-tier banks to build a €1.8bn book for a €750m trade.

A weaker market tone meant another day on the sidelines for the many issuance hopefuls that are said to have mandated trades but are yet to find a sufficiently appealing window. European stocks sold off on a slide in commodities and fears over runaway inflation and potential recession.

KBC had other ideas, striding into the market with a three-year non-call two holdco senior offering – the first senior unsecured transaction from a core European bank since the credit market's recent repricing.

"It was not a go day for many issuers therefore I was quite surprised to see them access the market now... even covered bond issuers decided to not proceed, which is a good indication the market is quite poor," said a syndicate banker.

A banker at one of KBC's leads said they had confidence to proceed because of the deal's defensive tenor and KBC's status as a Belgian national champion.

"There is quite a big difference between what credit indices and equities are telling you and what investors are happy to do on primary," he said.

The deal was marketed with initial price thoughts of mid-swaps plus 150bp area, via BNP Paribas, Bank of America, Credit Agricole, Commerzbank and KBC Bank.

"It will be interesting to see how far they can move," said a DCM banker away from the deal shortly after it was announced.

"It is one of a few names that has a very strong and loyal buyer base and they tend to print relatively small deals, of €500m–€750m, and it is in my view probably the most defensive transaction you can print, a holdco senior offering a lot of spread in the very front end of the market, so it should be a very good test."

With demand passing €1.5bn, the leads set the spread at 125bp before fixing the size at €750m.

The 25bp move from IPTs is the largest any bank has achieved in the euro senior unsecured market since May 16, according to IFR data.

"I don't think you could do that on any trade," said the lead banker. "It was doable here on a three-year non-call two but if we had done a six-year non-call five, for example, investors would have been more prone to put on limits. Yes, it is a good indication, but it's not something you can replicate with any transaction.

"KBC showcased what investors want to see at the moment, something straightforward from a national champion with a premium and short-dated, a good place to park your cash even if you are not keen on adding too much... it clearly tells you that the primary market is still alive and investors are happy to engage, but obviously it is not the same for every type of deal."

Final demand for the trade, expected to be rated Baa1/A–/A, came in above €1.8bn.

Most bankers saw fair value at around 115bp, implying KBC paid a 10bp concession, but others saw it slightly wider at 120bp.

Should I stay or should I go?

The new issue demonstrates just how significantly funding costs have risen in the last couple of weeks even for top-tier, core European issuers, and even more so when compared with KBC's previous holdco senior transactions earlier this year.

In January, KBC paid a spread of 70bp for a €750m six-year non-call five and in March paid 90bp for a €750m four-year non-call three offering.

Those trades were bid at 142bp and 129bp, respectively, on Wednesday, having widened by roughly 40bp since the sell-off initially sparked by the European Central Bank meeting on June 9.

The extent of the repricing means the many prospective issuers that are said to be waiting in the well-stocked FIG pipeline face difficult decisions, choosing between paying the levels required or holding fire in the hope that markets improve.

"There are certainly two schools of thought out there," said the DCM banker. "Either you pay the market price today and accept whatever you can get, if you have a gloomy view on the market post-summer, or if you are well funded and have a view that the market might be better post-summer you can sit on your hands.

"In that context it is hard to say KBC is doing the right thing or the wrong thing."