UNEASE HAS SPREAD to sovereign, supranational and agency issuers. "It’s the most uncertain time ever seen in this market. Every morning, we don’t know what the day will bring. The banks don’t know, the investors don’t know. No one knows," says a European supranational funding head reflecting on the present state of the SSA market.
The source of such uncertainty is the newly minted asset class of government-guaranteed bank paper, in which Barclays launched the first deal on October 24. In its wake, SSA spreads widened against swaps by upwards of 40 basis points. For a market that traditionally moves only single basis points at a time, and has always been seen as a haven from the world’s financial turmoil, these spread moves were completely unprecedented and utterly shocking. It is no wonder that a conversation over appropriate fees paid by SSAs to banks for issuance has sprung up in the aftermath. "SSAs used to explore pricing within tenths of a basis point," says Mark Wheatcroft, co-head of debt syndicate at UBS. "Now there could be a 10bp to 15bp range. All are having to adapt."
Suddenly, holders of SSA bonds were looking at a big repricing of their portfolios as their steady, sensible SSA exposure suddenly became a collection of highly volatile bonds. When investors realized that they could get an attractive pick-up over their SSA holdings while still enjoying an explicit and irrevocable guarantee from the UK government, many were quick to take that opportunity, and SSAs paid the price. The $4 billion, three-year global deal from the European Investment Bank blew out to 20bp over swaps just two weeks after pricing at 40bp through. "No one predicted the swiftness of the widening," says Martin Egan, head of global primary markets at BNP Paribas. "Ten years of spread tightening was undone in two days."
As with any hastily prepared government measure enacted since the credit crunch, there have been unintended consequences. The intention was simply to allow banks access to medium-term liquidity in an effort to stimulate lending and so prop up ailing economies. But banks still face the same concerns over such things as deleveraging and capital ratios, and the SSA market, until now safely tucked away in the calm eye of the financial storm, has been sucked into the maelstrom. "The rule book has been completely blasted out the window," says a supranational treasury official. "The way of the past is very much in the past, and only those capable and willing to adapt will prevail."
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"No one predicted the swiftness of the widening. Ten years of spread tightening was undone in two days"
Martin Egan, BNP Paribas |
There are precious few that have done so thus far, and the SSA market is at a virtual standstill, as no one has any clue where to price anything any more. Deals are now coming through from such issuers as Germany’s KfW Bankengruppe, but those institutions used to funding at 20bp or 30bp under Libor are now faced with the prospect of competing for investor attention with bank issues at more than 20bp over, which are every bit as explicitly protected by their government as are the best supranationals. "Why would I ever buy SSAs again when I can get short-dated, explicitly guaranteed paper at 20bp over swaps?" shrugs one investor.
Those SSA names that have issued paper since the introduction of government-guaranteed bank debt have felt the full effects of the market’s state of bewilderment. In the first week of November the Irish government issued a €4 billion, three-year bond, the first syndicated sovereign transaction since the collapse of Lehman Brothers. The deal priced at 25bp over mid-swaps, the wide end of guidance, and some 122bp over German Bunds. Then, on November 10, in the agency sector, Asfinag, the Austrian infrastructure agency, launched a €1 billion, five-year bond at a staggering 42bp over mid-swaps, a new high in the SSA market. Asfinag arrived at that price by referencing the sovereign CDS of Austria, which trade around 20bp wider than those of the UK. The guaranteed Lloyds TSB deal that priced on the same day as Asfinag’s deal came at 20bp over mid-swaps, so Asfinag concluded that its own deal, which enjoys the explicit guarantee of the Austrian government, should price at 20bp over a deal that is explicitly guaranteed by the UK government. But the agency has since come in for no small amount of criticism for pricing its deal far too low, and the fact that just three days after the launch it was trading at just 24bp over swaps lends some credence to that criticism. "I felt the Asfinag deal was too cheap," says a bank syndicate official. "Referencing the sovereign CDS may have been a mistake, now we know more we can see that it was unfortunate for them."
Banks are benefiting
But while the SSA market has become jaded, the new guaranteed bank debt has gone from strength to strength. Since the Barclays deal, which came at 25bp over mid-swaps, a number of other guaranteed deals have come to market, and prices are improving. On October 29, HBOS launched a €3 billion, two-year deal at 20bp over swaps. Again, the priority was success rather than pricing to the last possible basis point. Again, the deal was well oversubscribed. Then, on November 6, RBS sold a three-year, dual-tranche deal, with both the €2 billion tranche and the £1.4 billion ($2.1 billion) tranche pricing at 20bp over swaps, the same as for the HBOS deal. But Lloyds TSB’s similar issue four days later, again with both euro and sterling tranches, priced at 18bp over swaps, the same level at which Nationwide launched its three-year, €1.5 billion deal soon after. All have tightened in secondary trading, with the Barclays deal now in single figures over swaps, from its launch price of 25bp over. "This is the best start to a new product that we could have hoped for," says Carl Norrey, head of JPMorgan’s frequent borrower business in Europe. "All deals were oversubscribed; there has been tremendous support."