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European bank bond issuance off the table until September

With just a handful of deals priced in May, fears are growing the senior unsecured European bank funding market will be effectively shut until September.

Senior unsecured bank bond issuance slowed to a crawl in May, as the memory of a robust first quarter – when European FIG senior unsecured issuance reached $158 billion thanks to the support of the three-year long-term refinancing operation (LTRO) – faded fast.

In May, as market chatter turned to the risk of widespread deposit withdrawals in the banking systems of Europe’s periphery, only a handful of deals emerged. 

According to Dealogic, banks in Europe raised just $9.7 billion in the month to May 25, down from $56 billion in January, $47 billion in February and $45 billion in March.

Highlight deal were few and far between. DVB Bank, the German specialist lender to the transport industry, got a €500 million three-year debut away in the middle of the month at 158 basis points over mid-swaps. UBS priced a €750 million two-year floating-rate note, while, in the UK, Tesco Bank sold a small retail-targeted bond offering a 5% coupon.

Debt capital market (DCM) bankers, as they tend to, tried to talk up the health of the market. “Absolutely better-quality banks can issue right now,” one tells Euromoney. “The market is not closed. It’s just they don’t want to pay these kinds of spreads, and the hefty redemptions coming due in the second half of this year have already been covered by the LTRO.”

However, southern European banks are shut out of the market right now. And as for better-quality issuers rejecting the terms on offer, spreads on cash bonds have tightened markedly from the wides of close to 300bp at the start of the year to closer to 160bp.

                 Bank issued senior unsecured debt 2012 by issuer region
Source: Dealogic 

However, the signals from financial issuers’ credit-default-swap (CDS) spreads are much more bearish. “CDS are responding much more to daily bad-news headlines from JPMorgan, from Greece and Spain,” the FIG banker admits. “It remains to be seen whether the cash markets are right about banks or the CDS markets.”

When capital markets bankers insist the markets are open, and claim it’s only that issuers don’t want to borrow at the prevailing price, that carries much less credibility when applied to banks than to corporates.

Banks are in the money-transformation business. If corporates are disintermediating them by going directly to the capital markets, where banks used to raise the long-term funds to on-lend, then what function do they serve? It’s a question of banks’ very survival.

When does the DCM banker think senior unsecured issuance volumes from European banks will pick up? “Unfortunately, given that many will go into quiet periods and then the summer break, it could be very slow now until September.”



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