Lower-rated and lesser-followed financial institutions hoping to execute unsecured transactions could face a long road to the market, bankers have warned, as unpredictable conditions deny them opportunities and investors favour more liquid names.
A stable first half of last week gave FIG issuers a foothold to finally begin to clear a hefty pipeline of senior unsecured deals. Issuance quickly gathered pace, culminating in a deluge of 10 trades in euros alone on Wednesday, including a rare taste of lower-rated debt in the form of a €500m senior preferred from BPER Banca – the first bank senior unsecured out of Italy since January 12.
But that stable footing was lost as equity markets crumbled beneath issuers' feet later that day. BPER's deal got through in the nick of time, but the deterioration dashed hopes that similar supply would quickly follow.
"We had almost three days of stability, that's why we saw the intraday BPER transaction, but now we are back at square one," said a banker at one of BPER's leads on Thursday.
The tone quickly improved and a positive open on Friday allowed the senior market to reopen, with the UK's NatWest selling a short-dated opco transaction.
But for the kind of issuers that require marketing efforts or at least a couple of days of stability before launching deals, bankers said the stop-start nature of the market represented a huge challenge.
The turbulence that has been a constant feature of 2022 – owing to the Russia-Ukraine conflict and concerns over rates and recession – has already sidelined those issuers for much of the year.
"It's very much a case of haves and have-nots in terms of market access," said a second banker.
The task is further complicated by upcoming public holidays across Continental Europe, the UK and the US and central bank meetings on the horizon, which will narrow issuance windows.
One step forward ...
With expected ratings of Ba3/BB+ by Moody's/Fitch, BPER's deal is the lowest rated in the euro FIG space since the unsecured market reopened at the start of last week.
Bankers said its success offered encouragement that deals could be done when there is a sufficient stability – with demand exceeding expectations – but on its own was not enough to open the door for further supply.
Leads Deutsche Bank, Morgan Stanley, Raiffeisen Bank International, UBS and UniCredit priced the deal at 245bp over mid-swaps, 20bp inside initial price thoughts, with books coming in above €850m (excluding leads).
"[BPER's deal] was a baby step," the lead banker said. "It was the lowest beta deal conceivable within the high beta space – it was a three-year non-call two, literally the shortest you can issue, it was mid-to-high Double B rated, and it was a clean bank, with no issues, be they regional, to do with Russia-exposure, or with non-performing loans.
"The pipeline of higher beta supply we're aware of and the rest that I'm sure is out there is not just Double B rated senior preferred. For those deals the path might be longer than expected, but we should still get there."
High bar
Market participants wondered aloud that if it took a spread in the mid-200s and almost three days of stability for a relatively clean Italian bank to sell super-short dated paper, then what might the cost be for a Greek or Cypriot bank – for example – to raise loss-absorbing debt, and how high would the bar be in terms of market conditions?
Among European banks, Greek, Cypriot and Portuguese lenders have the largest shortfalls to their final minimum requirement for own funds and eligible liabilities targets relative to their total assets. This year has been identified as a crucial one for banks to make headway.
Furthermore, while a risk-off tone dominates the market and more liquid alternatives offer elevated prices, bankers said such credits would face a hard time in commanding an audience.
"Look at the returns people got buying Deutsche Bank this week," said a third banker, referring to Deutsche's €500m six-year non-call five senior non-preferred priced at 193bp on Tuesday. "Investors don't need to chase that additional spread or yield by going into second or third-tier names."
The events of last week also showed how issuers hoping to execute riskier capital transactions face a tough task. For example, reinsurer Munich Re on Wednesday was unable to tighten the price of a US$1.25bn 20-year non-call 10 green Tier 2 from initial price thoughts, ultimately fixing the coupon at 5.875%, after markets turned against it. Bankers suggested the deal could have struggled to get over the line if it were not for the strength of the credit.
The euro market is yet to see any benchmark subordinated transaction since European banks exited their first-quarter reporting blackout periods. Deutsche Pfandbriefbank remains in the pipeline with a potential €300m Tier 2 transaction after holding investor calls last week.
Bankers close to the deal said they would continue to monitor the market this week.