BNP Paribas and Commerzbank reopened the euro bank market with successful senior unsecured trades on Monday, securing attractive levels while paying slim concessions, although investors made a clear display of price discipline.
The deals are the first euro benchmarks from the FIG sector since 22 July, ending a summer break that has seen spreads grind tighter, reclaiming more of the ground lost in the volatile early days of the coronavirus crisis.
BNP Paribas' eight-year non-call seven senior non-preferred (SNP) offering was marketed with initial price thoughts of mid-swaps plus 120bp area.
Sole bookrunner BNP Paribas then revised guidance to 95bp area with books in excess of €2.85bn. The spread was subsequently fixed in line with guidance at 95bp with books having dropped to €2.25bn-plus. The size was later set at €1bn.
Bankers said the positive result encapsulated the opportunities of the new issuance window, with BNP Paribas securing a tighter level than would have been achievable pre-summer, while paying a relatively small premium.
The bank paid a final new issue concession of 5bp, down from the 30bp offered at IPTs, based on its secondary curve.
Nevertheless, that the deal priced in line with guidance and the final book stood at €2bn, some €850m short of the peak, showed investors are willing to push back on pricing even after a month without supply.
"One can read from this that there's probably more price sensitivity than we would have thought," said a syndicate banker away from the deal.
Bankers said, however, that it is understandable investors would push back after the tightening in spreads seen over the summer period.
The iBoxx EUR Banks Senior index has tightened 15.4bp since the last euro benchmark senior deal was priced on July 16, closing last week at 75.3bp - its tightest level since early March.
A banker close to BNP Paribas' deal said they had explored the possibility of a tighter print but decided 95bp was the right level, prioritising secondary market performance.
"One of the key views we've had from investors is that spreads have ground tighter over the summer months on the back of nothing," he added.
"Can you price flat to fair value on a spread that's already rallied a lot? Investors have been clear they would expect some premium on top of that."
"THE RIGHT STRATEGY"
Commerzbank adopted a similar pricing process for its seven-year senior preferred note, which the bank specified will be eligible liabilities for MREL.
Leads ABN AMRO, BBVA, Commerzbank, Erste Group and Societe Generale opened books for the seven-year offering with IPTs of mid-swaps plus 105bp-110bp area.
Fair value for the new issue was around 80bp, based on Commerzbank's senior preferred curve, implying a starting premium of some 30bp.
Guidance was moved to 90bp and the size at €750m, before guidance was revised to 85bp (+/-2bp WPIR) upon more than €1.7bn of demand. The deal was ultimately launched at 83bp with books above €1.6bn (pre-rec).
"[The deal] shows investors are back," said a syndicate banker at one of Commerzbank's leads.
"It was a relatively slow process, but it is a Monday, post-summer, so the morning meetings were most likely more intensive than normal. But the granularity is there."
Bankers said both Monday's trades had set a pricing template that other issuers can follow.
"Starting around 30bp back [of fair value] is the right strategy," said the first syndicate banker.
"These deals tell you the market is clearly open, and at least in senior, starting 30bp back gets you a very good outcome."
NOT MUCH LEFT
Other issuers are already lining up to enter the newly reopened euro market, with Berlin Hyp mandating a 10-year green Pfandbrief and Athene preparing a five-year FA-backed note.
But overall, FIG supply is expected to be relatively modest over the rest of the year. Many banks have already completed the bulk of their 2020 issuance programmes, and funding needs have been cut by the availability of cheap central bank loans.
"Cross-checking across all [the Q2 results], each bank is maybe not completely done with funding, but they are close and there is not that much left to do," said the first syndicate banker.
When reporting its second quarter results on July 31, BNP Paribas said it had issued €9.7bn of the €13bn of SNP debt target in its 2020 funding plan.
Commerzbank has revised its 2020 funding plan to "well below" the €10bn it originally had, saying that participation in the TLTRO III has replaced its funding needs for Pfandbriefe for the rest of the year.
The bank had already raised €5.1bn across all formats in the first half of 2020.
"Supply will ultimately be relatively low from now till Christmas," said a DCM banker, "but I think what supply we see will be frontloaded, as we've got the US elections a quite a lot of potential noise towards the year-end."