Europe's financials make hay while the sun shines

Fri Mar 8, 2013 11:22am GMT

LONDON (IFR) - European financials are hitting the capital markets as fast as possible, and more are expected to take advantage of the current conditions, before headline risk pushes spreads wider in the months ahead.

In a market rocked by volatility ever since the SNS Reaal debacle, the Italian election stalemate has underscored the importance of funding sooner rather than later.

Swiss Re, BBVA, HSH Nordbank, Credit Agricole and Allianz jumped into the market this week, and a pipeline of senior and subordinated bond mandates continues to build.

Unfortunately the market appears closed for many, with zero supply from the second tier periphery and Italy's banks face a tough road once they come out of pre-earnings blackout.

"Everything has completely changed," said Vincent Hoarau, head of FI, covered bond and ABS syndicate at Credit Agricole CIB.

"We're now in a place where issuers are seeking to lock in relatively cheap funding before spreads widen out even further."

Financial institutions seem to be heeding the message, with over 9 billion euros equivalent priced this week across senior, covered and subordinated bonds. The tally was just 2 billion euros last week.

Among the names looking to issue are Storebrand, AG Insurance, Catlin Insurance, Dexia Credit Local, Provident Financial and Santander Consumer Finance. Many could come before the end of the month.

BBVA and HSH Nordbank, for example, avoided higher borrowing costs this week by steering clear of the longer end of the credit curve, opting to sell three-year deals instead in the senior and covered bond markets respectively.

Investors were surprisingly receptive to BBVA's deal, which managed to get away with a slimmer new issue premium than Credit Agricole or Morgan Stanley during the week.

"Don't forget that we have learned to live with volatility over last two years," said Erik Schotkamp, BBVA's capital and funding management director.

CHOPPY WATERS

Nevertheless, the past few weeks have been exceptionally choppy since the Dutch government's shock decision to wipe out junior bondholders in SNS Reaal in February.

The iTraxx Subordinated Financials index has bounced around in a 235bp to 275bp range, while the Senior Financials index has see-sawed between 138bp and 165bp.

The troubled Italian election has meanwhile served to remind the market that political risk is a huge catalyst for volatility, which could send funding costs soaring - or worse, lock peripheral banks out of the market altogether.

In the face of all this, syndicate bankers say they are advising recent issuers like Credit Agricole and Morgan Stanley to add attractive premiums to get investors involved.

"Issuers are right to default to the worst case scenario when the underlying economics are so fragile," said a syndicate banker. "It makes sense to be cautious in this market."

At the same time, peripheral and troubled banks from Europe's core are being advised to be exceptionally wary, if not stay away entirely.

And some do not even have the option.

Bankers say second tier Italian and Spanish issuers like Banca Popolare di Milano, MPS, Banco Popolare and BPE currently have no access to the market.

"It would not be advisable for an Italian or a second-tier Spanish bank to try to sell a deal in this market," said another syndicate banker.

Bankers warn that the headline risk ahead remains considerable, and that conditions could deteriorate due to economic risks, private-sector deleveraging, falling house prices, fiscal consolidation and shaky confidence.

"The likes of BBVA, Santander and maybe La Caixa are still in a relatively good position," said another syndicate banker.

"But I think an Italian issuer would have to pay quite a bit to get investors interested, and second-tier peripheral names have no access." (Reporting by Aimee Donnellan; editing by Natalie Harrison and Marc Carnegie)

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