Bank Leumi proved demand on Wednesday for high-rated CEEMEA credit risk with a US$500m five-year note that was the first by an Israeli lender in senior unsecured format.
The bank (A2/A/A), which is Israel's largest by assets and market capitalisation, was drawn into international waters by the opportunity to diversify its funding base and favourable moves in the basis swap.
"There is a really active shekel market, and the basis swap historically has been such as to make the dollar market very expensive," said a lead. "Over recent weeks and months, with the dislocations in the market, we've seen an improvement in the basis, which has meant we've had the rare occasion where the dollar market currently offers comparable funding versus shekels."
Leumi had been the first lender from Israel to sell an international bond, when it placed a US$750m Tier 2 note in 2020. It was followed into international markets by Tier 2 deals from Mizrahi and Hapoalim. But the lack of senior unsecured issuance gave Wednesday's trade a strong price discovery flavour.
Leumi opened books marketing the benchmark at Treasuries plus 235bp area.
"It’s actually tighter versus where I thought it would come at IPTs," said a banker away. "That being said, I had a rationale that would get me to 225bp and one that would get me to 325bp."
A second banker away was unconvinced that the outstanding Tier 2 would act as a sound base for calculating fair value for a senior unsecured.
"I don’t think the Tier 2 differentials work at the moment," he said. "They only work in non-EM investment-grade, and even then they are all over the place."
The first banker away thought that another method would be to look at other Middle East banks.
"You can take some of the best Middle East banks like Qatar National Bank and say fair value for them would be around 125bp–130bp," he said. "You can price it back from there, and then you need a big new issue premium, given this market."
A third method, albeit they are far bigger and more familiar institutions for investors, was to look at recent prints from US investment-grade banks, such as JP Morgan (A2/A–/AA–), which sold a six-year non-call five dollar bond on Monday at 175bp.
One anticipated element in favour of Leumi was the prospect of a strong bid from the US, in the face of a sour mood among the buyside.
"You ask any investor which they'd prefer to see between banks, corporates and sovereigns, and they'll say banks are at the bottom," said the first banker away.
"But the Israeli banks are in amazing shape, are very liquid and have strong balance sheets. So, I do think from a credit perspective they are in a good position. It's more about liquidity and the markets and are people willing to buy?"
Investors did prove willing to play, as orders grew to over US$1bn by the time the US came in and then drove higher to US$1.55bn. The spread was fixed at 210bp.
"They had domestic support but there was a very international flavour to the order book, and the bulk of the orders came from the international buyer base," said the lead.
"It reminds you of the value of 144A. Middle East deals have shown the value of the local bid for getting deals done, and there was a bit of that here, but the 144A aspect was important. If you put the two together, then, for the right name you can get a result comparable with 12 or 18 months ago."
Citigroup was global coordinator and was joined as a bookrunner by Barclays, Jefferies, JP Morgan and UBS.