Keith Mullin hears upbeat messages in Madrid.
MY RATES ROADSHOW trundled on this week, moving from New York to Madrid. The Spanish capital is one of Europe’s great cities but alas, a strike by street cleaners has dominated all the headlines.
I won’t comment on the rights or wrongs of the strike on either side, but large and unsightly piles of malodorous trash on the streets have given the town a decidedly shabby and near-hostile look. It’s almost like Spain is playing to form a couple of years late, taking on the persona of a sad, bombed-out down-and-out economy with nowhere to go.
But as my excellent roundtable participants – Antonio Villarroya, head of G10 macro strategy at Santander; Alexander Duering; head of relative value rates research at Deutsche Bank; Pablo Zaragoza, head of US and Europe interest-rate strategy at BBVA; and Doug Renwick, head of Western European sovereigns at Fitch – said during our wide-ranging and insightful discussion, that’s not how it is. In fact, they broadly agreed that prospects for Spain and the rest of the eurozone periphery are looking up.
The rally in peripheral eurozone government bonds and good levels of market access for peripheral banks and corporates in the primary debt capital markets feels more than a technical yield play that’s attracting momentum buyers. While that is a big driver, I’m hearing more and more about the fundamental case that’s also building – albeit slowly. It’s certainly not risk-on across the board; but the issue appears to be morphing to one of timing, of when to start layering in your investment in the periphery rather than if.
Spain’s macro numbers don’t make for fun reading but in some cases they are improving. Indeed, the country is exiting its €41bn bank bailout in January without asking for additional funds. Elsewhere in the periphery, Ireland will exit its bailout without a back-up emergency credit line, while Italy’s political risk fears are receding. The fate of Portugal and the nature of the exit from its bailout next year lies with the preparedness of the country’s constitutional court to back austerity measures. The country still has its naysayers, for whom government bond yields below 6% (which were in from the 9% area a year ago) arguably look a little rich.
The peripheral trade has been almost exclusively a domestic story of late but it’s the re-emergence of the international bid that has squeezed Spanish 10-year Bonos yields from close to 6% a year ago to converge on Italy at a tad above 4% and close to their lows for the year. There’s no direct correlation between bond yields and sovereign ratings, but Spain’s lowly ratings look increasingly detached from the country’s government bond yields.
The technical yield play has been attracting momentum buyers, but the fundamental case is also beginning to build
THE LEVEL OF capital markets access that the Spanish state and Spanish bank issuers have enjoyed in size and up and down the capital structure (AT1, Tier 2, senior and covered bonds; exchangeables and mandatory convertibles; in Yankee, Eurodollar and euro format all with good levels of over-subscription) has been note-worthy.
And it’s not just the national champions and big names that are tapping the market. BBVA, Santander, Caixabank and Popular have certainly all printed, but we’re now seeing the likes of Cajamar and Caja Rural de Navarra in the market in covered bonds and the market is gearing up second and third-tier names in the year ahead. That would have been unthinkable even at the start of the year.
Broadly speaking, banking fundamentals appear to be moving in the right direction – deposits are up, liquidity and solvency ratios are better, assets have been reclassified and provisioning levels are more prudent. No great dramas are expected from the asset quality review or the stress tests, although Mario Draghi’s insistence that some banks will have to fail the tests to make them credible has added to concerns.
There are also lingering doubts in the eyes of some investors and analysts about the collateral value of some of the real estate and dud real estate loans held on the banks’ books or in government-backed bad bank Sareb.
Bankia Habitat kicked off an online auction this past week of more than 1,000 properties throughout Spain, the first time it has held an auction with Sareb assets. The outcome – the auction ends on November 21 – will be an important test of whether large-scale asset sales can continue to find decent clearing prices.
A LARGE NUMBER of hedge funds, distressed debt specialists and private equity players have been circling Spanish commercial and residential property all year looking for bargains and are actively bidding at the auctions. But it’s getting very competitive. In the past week, for example, Deutsche Bank won auctions for loan portfolios with a nominal value of €323m. The €233m Abacus portfolio that it bid for in partnership with Blackstone fund Magic Real Estate for around 30 real estate loans attracted more than 100 bidders.
Sareb has completed some benchmark deals in recent months. US hedge fund Davidson Kempner, through its Burlington Loan Management fund, recently acquired a €245m portfolio of non-performing loans to real estate firm Inmobiliaria Colonial, while distressed debt specialist HIG Capital, through its credit affiliate Bayside Capital, won the Project Bull auction for 939 homes in a deal that valued the portfolio at €100m. That had been the first Sareb real-estate asset portfolio offered to the wholesale market.
So, so far so good. But having offered up so much positive comment, I offer a slightly contrarian note of caution. Spain has gone bets-on so quickly so my question is this: is the market running too quickly ahead of the realities? After all, it’s not as if it hasn’t happened before …