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By Tessa Wilkie
It’s not unusual to hear SSA bankers claiming undying devotion to the public sector debt markets, but this year a renewed sense of optimism seems to have taken over some of the bigger players, despite a bleak year in the markets.
Euromoney has heard ‘we are totally committed to this sector’ umpteen times. But during this round of awards pitches many SSA bankers managed to proclaim it with a marked lack of rictus grins or sweat beading on their temples.
Of course, they may have invested in acting lessons or having their sweat glands botoxed, or simply be so used to horrendous markets that their faces are now frozen into perpetual half-smiles, but a quick look at the data reveals some justification for the optimism.
It could be that the sector is finally getting to grips with the problems it has wrestled with for years.
Revenues in the public sector debt markets appear to be turning a corner. According to Dealogic, year-to-date DCM revenues up to June 24 in the sector stand at $1.125 billion – up from $1.002 billion for the same period last year.
This is not yet back to 2012 numbers of $1.296 billion, but SSA volumes stood at elevated levels from 2009-2014 as the global financial crisis produced more demand for public sector lending.
Some of this could be down to longer-dated issuance – the sector has produced benchmarks in the ultra-rare 50-year tenor for France, Belgium and Spain in 2016. Long-dated deals tend to pay higher fees as banks are rewarded for taking on more risk.
Fee revenues aren’t the whole picture. But anecdotally, bankers and issuers in the sector are finding ways to get more comfortable with thorny issues like the cost of posting collateral on derivatives related to transactions – this was a constant worry two or three years ago, but in many cases issuers have updated documentation to help banks reduce cost, or are taking on more of the cost themselves.
The capital intensive public sector debt markets have been posing a problem to many banks since the 2008 financial crisis brought in a raft of regulation determined to make it more difficult for a bank to throw its balance sheet around.The sovereign and sovereign-related financing business has traditionally been one that banks have had to be involved in for the prestige. If a bank wants to be a global financing house, it needs to have an impressive public sector franchise. But regulation post 2008, and the realisation that not all government-related risk is pure triple-A, drove up the costs of the business, leading many players to reassess their approach to it.
The fear that a raft of banks would begin to quit the business wholesale raised its head in late 2012 when UBS tore into its public sector teams and effectively quit the business (despite keeping on most of its primary dealerships).
The flood of exiting banks never quite followed but there has been a steady trickle of banks reducing their presence. RBC Capital Markets quit many of its European primary dealerships in 2013, while in the last 12 months alone, Société Générale has resigned as a Gilt Edged Market Maker, Credit Suisse quit many of its European primary dealerships, Deutsche Bank is no longer one of Belgium’s and Commerzbank left Italy’s list of primary dealers.
This should be a healthy, if painful, development. Under a regulatory environment that makes the use of capital expensive, banks have been forced to reassess their attitudes to a traditionally capital-intensive business. Only a few can, and should, attempt to be global powerhouses. All banks simply can’t be all things to all clients anymore.
This year the big beasts have begun to pick up market share. Of all rank-eligible public sector deals in DCM, the top five bookrunners in Dealogic’s rankings have accounted for 32.95% of volume in 2016 year-to-date to June 24, up from 31% for the top five last year and 32.4% in 2014. The top three have clawed back market share from 19.6% in 2015 year-to-date to 21.71% this year.
A truly difficult start to the year in primary issuance markets, with volatile dollar swap spreads and distortion caused by ECB intervention in euros, makes it clear that sovereign issuers and their close relatives need expertise, and risk appetite, from their banks as much as ever.