FIG issuers race to market with one eye on the pipeline

IFR 2447 - 20 Aug 2022 - 26 Aug 2022
6 min read
EMEA
Tom Revell, Helene Durand

The euro FIG market saw an unusually early reopening after a brief summer break last week as the looming spectre of a hefty pipeline of trades from riskier or less well-known financial institutions raised concerns over a potential weakening of market conditions down the road.

Financial institutions raised an unseasonably high €13.2bn euro-denominated debt across all asset classes over the week, plus £1.5bn of deals in sterling.

"It’s much busier for this time of year than we’ve ever seen," said one head of syndicate. "In credit at least, this week is typically a goose egg but instead we’ve had something like €10bn done across asset classes [as of Wednesday]. It’s been a remarkable couple of days."

Issuers flocked to the market after first Volvo, with a €500m note on August 11, then Swedbank, with a €750m Tier 2 on August 16, showed euro investors were ready to engage despite the time of year.

One of the drivers of the high supply has been issuers' desire to get deals done before a potential deterioration of market conditions and a rise in funding costs.

In addition to the usual concern around market indigestion after sustained heavy supply, market participants are this year mindful of an unusually large pent-up pipeline of riskier trades.

"It's all part of this game theory we've seen this week – people thought next week would be really busy, then Swedbank went OK, so lots of people came this week instead," said a syndicate banker. "You don't want to follow a trade that has made the market softer."

Watching and waiting

So far, the cast of issuers to venture into unsecured markets post-summer has been limited to banks that are, if not all necessarily national champions, at least high-quality and well-known credits. Banks from peripheral countries or weaker second or third-tier lenders have been notable by their absence.

Turbulent market conditions throughout the year have limited the opportunities available to weaker or lesser-followed issuers, as they require a higher bar in terms of market stability and often need a longer run-up to hold investor calls and give accounts time to carry out credit work.

The result is a backlog of trades still waiting to be executed. The pipeline is said to include difficult senior unsecured or subordinated deals for the likes of the Greek banks, most of whom have been unable to make progress towards their MREL targets this year, and smaller or lower-rated southern European lenders and lesser-known debutantes.

The European Banking Authority noted in April that smaller banks are lagging behind larger peers in building up to their final MREL targets, which, for most banks must be met by January 2024. The Greek banking sector has the largest shortfall to final MREL targets in any EU country, with a €10.9bn shortfall identified by the Single Resolution Board as of the end of 2021. Eurobank is the only Greek lender to have tapped the market this year, selling a €500m senior preferred in May.

“There’s a lot of that stuff – the pipeline is more weighted towards to more difficult names, so for those easier ones it’s smart to come now," said one head of DCM.

The syndicate banker said he was involved in a handful of projects from "more esoteric" issuers hoping to get their chance in early to mid-September.

"For bigger names, if you stick it on screens at 35bp cheap [to fair value] it will probably go well. But for these names it's not really a case of the level, it's more a case of having lines available," said the syndicate banker. "For these, you have to wait until we've had the initial flurry of August trades to show whether the market is working well in terms of liquidity and everything else."

Top-tier issuers are keen to avoid the pricing consequences of coming after their riskier peers push up spreads and premiums as they pay the larger concessions required. "If you're a lower spread-paying issuer, a well-known institution, it is not going to be to your benefit to be in a busy market with people paying a lot more than you are," said a second head of syndicate.

Back in the pool

Bankers said the market had coped well with the unusually early deluge of supply as investors see value at opposite ends of the capital stack.

“The market feels very strong. It almost feels like it did post-Covid, post-eurozone crisis – these periods where there were a lot more investors back in the pool. For a long time, things were so tight, investors were [buying] begrudgingly but some accounts now feel like there’s value,” said a global head of DCM.

However, other bankers noted some senior unsecured trades had notably underperformed relative to other asset classes. They suggested valuations for some issuers had tightened too far, after markets rallied on the back of the lack of supply over the summer months.

Some senior non-preferred and holdco senior trades at the tighter end of the spread spectrum were relatively thinly oversubscribed, with KBC Groep and Nordea Bank seeing their books fall away after revising spreads tighter.

In contrast, Swedbank's €750m 10-year non-call five Tier 2 on Tuesday garnered a €3.3bn-plus book, before ING Groep on Wednesday drew €2.6bn-plus demand for a €1bn green 11-year non-call 10 Tier 2.

Market participants said the Tier 2 product is more highly sought after as it offers wider spreads, higher yields and greater performance potential after the summer rally.

The sterling deals came from Svenska and Zurich Insurance.

See Bond section for coverage of individual deals.