Funding: Markets lap up Portugal’s bank and corporate risk
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Funding: Markets lap up Portugal’s bank and corporate risk

Periphery banks fund without ECB help; bank-sovereign feedback loop is a worry.

Last month Banco Comercial Português priced its first stand-alone senior unsecured bond for four years. The €500 million three-year deal attracted some €3 billion of demand at a spread of 285 basis points over mid-swaps. Just as the sovereign needs to demonstrate access to international capital markets as it approaches the exit from its bailout programme, so Portuguese banks beyond national champions like Banco Espírito Santo and Caixa Geral de Depósitos must demonstrate ability to fund unsupported by the European Central Bank.

Piers Ronan, head of FIG capital syndicate at Credit Suisse, tells Euromoney: "This deal is a signal that BCP is back as a capital markets issuer. The bank is focused on its net interest margin and expects spreads to tighten from here, and that’s why it didn’t do a bigger deal or a longer maturity, although it easily could have."

BES, which has stronger credit metrics than BCP, issued in January to an enthusiastic reception after a blow-out sovereign bond. "Portuguese sovereign bonds have rallied hard this year, and after a long period out of the primary market, banks still offer a good spread to the sovereign without much give-up in liquidity, so investors with positive views on Portugal are expressing that in bank bonds," Ronan says.

Banif, a Portuguese regional bank that has undergone profound restructuring under majority state ownership and is scaling back to focus on the SME sector, in January sold to asset managers across Europe €437.5 million of senior notes from a securitized portfolio of more than 10,000 SME term loans and revolving credits that it originated and services. "What’s noteworthy here is the sheer size of the deal, the biggest bank securitization out of Portugal since 2007, and the pricing at just 195bp over three-month Euribor," says Olivier Renault, head of structuring and advisory at StormHarbour Securities, which arranged the transaction. "It’s an important signal that Banif is using half the proceeds as funding, rather than as pure capital relief, and that it can accept the higher cost of funding in the market rather then repoing the underlying loan portfolio to the ECB."

He adds: "When we did a €158 million consumer and auto loan securitization for Banif back in 2012, yields were north of 10%." Paulo Gray Pereira, one of StormHarbour’s principals and a former Portugal country head for Citi, recalls that even as recently as May 2013, when StormHarbour raised €450 million for Electricidade de Portugal in a securitization of electricity tariff receivables, it was a struggle to get deals done for the country. "We approached more than 500 investors on that deal. In the end 29 investors participated. There were a similar number in the most recent Banif SME deal, but they came in after we approached just 90 potential buyers," he says. "Every week we hear of more large, real-money investors visiting Portugal and putting it back on their accepted list because it has delivered on painful reforms. For now, corporate loan demand may be subdued, but the banks are restructured and can deliver credit and fund in the markets."

Grasping for yield

Investors are grasping for yield, of course, in snapping up senior unsecured bank bonds across the periphery and looking at second-tier banks. For banks in countries such as Portugal that have been bound to Troika-monitored fiscal and economic adjustment programmes, investors might also be assuming that those monitors have played particularly close attention to the banking systems and so the ECB’s asset-quality assessment will not flush out any nasty surprises.

Paulo Gray Pereira, one of StormHarbour’s principals and a former Portugal country head for Citi
Paulo Gray Pereira, one of StormHarbour’s principals and a former Portugal country head for Citi

Pereira says: "There have been other less obvious benefits from reforming under Troika supervision, for example in enhancing and refining insolvency laws and creditor rights." Have investors grown complacent? In the equity markets too, European bank stocks have been the risk-on trade of choice in recent months, outperforming the MSCI Europe index through tapering fears, the emerging markets sell-off and worries over the ECB’s asset-quality review and possible new supply of capital.

There is something of a confidence trick at work here as the ECB’s OMT [outright monetary transactions] programme drives down the yields of periphery sovereign bonds, allowing banks to wring profits from a carry trade in them. Vincent Deluard, European strategist, and Tim Hayes, chief global investment strategist, at Ned Davis Research, argue that the banking systems of certain periphery countries, notably Italy, have become like giant leveraged hedge funds betting on their country’s debts. "Since European banks keep most of their bond portfolios as ‘available for sale’ and ‘trading’, the spectacular rally in peripheral bonds should turn into a windfall for European banks’ earnings. Assuming that most of the LTRO loans were invested in Spanish, Italian and Portuguese bonds at a 6% to 7% carry, the programme should net an annual €70 billion for the banking sector."

The obvious worry is that, if yields on sovereign bonds should be forced up, investors will find that the feedback loop between peripheral sovereigns and banks has never been stronger. The Ned Davis analysts take a strange kind of comfort from this: "The European Central Bank will likely do everything in its power to prevent another spike in yields, as it would devastate both sovereigns and banks."

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