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21 June 2011
Banks warned to expect higher funding costs
LONDON, Jun 21 (IFR) - FIG syndicate bankers are bracing themselves for an increase in new issue premiums when the primary market reopens. The consensus is that lower-beta names will lead the charge, as they have done after previous periods of market closure, but that investors will still require some extra compensation for the recent sovereign turmoil.
"Premiums will definitely be higher," said one. "For that reason, the main risk is that well-funded, high-quality issuers will baulk at that and keep the market closed. Even if we don't see a traditional summer lull anymore, liquidity for the punchier names is certainly limited over the summer months so we definitely need the stronger credits to issue if the market is to reopen to a meaningful extent in the weeks to come.
"This is bad, in that previous negative headlines haven't affected the lower-beta names in quite the same way. Take the Moody's announcement on UK banks, for example. There was a short-term reaction but no long-term impact on spreads for the stronger names."
The risk that borrower reluctance keeps the market shut is underlined by figures from one investment bank setting issuance this year against redemptions, which show several favoured jurisdictions in a comfortable funding position. Nordic and Dutch issuers, for example, are 104% and 138% funded for the year, while jurisdictions whose banks are most in need of liquidity are the ones least popular with investors. Bailed out peripherals are 6% funded; the figure for Spain, excluding BBVA and Santander, is 33%.
Even if national champion issuers could be persuaded to put a deal on the screens, some market participants believe this is unlikely to happen before mid-July, when there will be clarity on whether Greece will receive its next scheduled tranche of international aid.
Given that concerns about exposure to Greek risk vary according to region and institution, it is difficult to generalise about the likely implications for cost of funding, but most estimates are in the region of a 10bp to 15bp increase.
"On average over the year, premiums were more like 8bp to 10bp, excluding the US issuers which tend to be more generous and some of the higher-beta names. But for some issuers, like NAB earlier this month, it got to as tight as 5bp," said the banker quoted above.
"An Aussie issuer will obviously have to pay less than Lloyds or Intesa, so I think you'll see 10bp premiums for good Aussie or Nordic names. For some of the more indebted issuers that have come to the market once too often, even in better times we've seen premiums in excess of 20bp."
CONCERNS OVER FRANCE
Of particular concern is the triumvirate of French banks put on negative watch last week by Moody's on the back of concerns about their exposure to Greece. Of the three, BNP Paribas is the least affected, with one trader estimating that on a bad morning it is 7bp to 10bp wider across the curve. For Credit Agricole and SG, the figure at the long end is closer to 30bp, he said, with an even more dramatic reaction in the Yankee market.
One investor said the move is overdue: "The French have been over-rated by Moody's since time began. We seem them as high Single A and would price accordingly."
But a converse view was posited by a syndicate banker familiar with the issuers. "Don't forget, the French banks have done a lot of funding this year so in theory their bonds are a lot more liquid as they're newer issues. Maybe it's easier for people to liquidate, or maybe more bonds are in the hands of trading accounts. You would expect older deals to be tied away."
While the situation in Greece remains the primary focus, some market participants believe it is having an influence on overall market sentiment, while regulatory concerns remain the key financials-specific question. One said the catalyst for the current closure was speculation that Anglo Irish Bank and Irish Nationwide might impose haircuts on senior bondholders.
Another syndicate official said the new issue market was slowing down more than a month before the events in Greece last week and that a repricing was overdue.
"Average deal sizes were smaller, as was the average investor ticket. Beyond the peripheral events, the slowdown in appetite was more a function of market level. A number of investors didn't argue with the pricing rationale on recent deals, which included generous new issue premiums. They were just not interested in buying as they felt the market was too tight."
Author: Matthew Attwood, IFR Markets