The first major euro SSA deals of 2023 showed that big initial concessions were needed to pull in investors, with Austria and KfW offering mid to high-single digits at guidance, and both were rewarded with strong demand.
The higher concessions came as issuers contend with a congested pipeline. With the Lunar New Year falling on January 22, and certain Asian markets closed for several days thereafter, the window in the first few weeks is tight, further complicated by a forthcoming EU transaction. The start of the ECB's quantitative tightening programme in March, as well as the cycle of central bank meetings, are also factors that are encouraging issuers to get out as soon as possible.
“Issuers are definitely rushing,” said a lead on the KfW bond. “We were conflicted on a couple of deals, which was a bit annoying. Austria accelerated. Ireland [which mandated a 20-year on Wednesday] also accelerated. [The] view was that volumes are going to be massive next week, and the peripheral names are probably coming next week. That’s why they went ahead.”
Austria got books of more than €32bn for its €5bn 10-year deal via Barclays, Bank of America, Deutsche Bank, Goldman Sachs, JP Morgan and UniCredit. Assessments of the concession ranged between 2bp-4bp after the leads set a spread at 8bp over swaps, 2bp inside guidance.
KfW, meanwhile, was offering a striking 7bp-8bp new issue concession at guidance for its five-year deal, according to a banker away from Wednesday’s euro deals. The development bank, though, tightened the initial 9bp below mid-swaps spread to 11bp below.
“[I’m] watching, amazed at what new issue concessions are doing,” said the banker away. “[KfW’s guidance price] for a five-year euro deal is quite a lot of basis points. I’m not sure I ever would have dared to put that on a 10-year.”
The banker did emphasise that illiquid secondaries have made discrepancies between bankers’ fair value assessments broader, making pricing more uncertain. A third banker, an SSA head, saw more coherence between the Austria and KfW concessions, putting both at 5bp-6bp at guidance.
KfW’s concession, however it was gauged, paid off, with the issuer getting a record-breaking €6bn deal done from a €19.5bn book via BNP Paribas, Deutsche Bank, JP Morgan and Morgan Stanley. The deal is the first time that the German agency has funded as much as €6bn from a single syndication.
Smaller issuers also got in on the action. BNG tightened its €1.5bn 10-year social bond by 1bp, to 11bp over swaps, following orders of €2.3bn. The Dutch name was seen offering a 5bp new issue concession at that level.
Rushing to fund
Like Austria and KfW, many SSA issuers will be looking to lock-in big funding early in 2023. There is more focus than usual on early funding, with a spectrum of events later in the year that could upset the market. Not least among them is the ECB’s introduction of quantitative tightening.
Avoiding big, liquidity-sucking names will also be high on issuers’ agendas.
“All the euro issuers are stressed out because the EU is coming to euros in three weeks for size,” the KfW lead said. “I think it will get messier. We’ve seen evidence of that already. This week, some issuers wanted to see a few references before going next week when there are going to be a lot of deals. Issuers clearly want the money now. They think yields and spreads are going higher, in euros especially.”
Issuers trying to fit duration into a packed start to the year face an uphill battle. Investors have plenty of options and inversion along the curve makes longer prints less appealing, bankers said.
“Anything shorter than 10 years is still definitely what investors are looking at,” said the banker away, “as the curve is still strangely-shaped, with a high inversion in the short maturities and a drop-off in yields after the 10-year [point].” For bank treasuries, he added, the preference is even shorter, leaning more towards the five-year mark.
Compounding the issue for euro funders looking for longer prints is the lack of alternatives. “There’s no duration available in dollars and we don’t think there will be,” said the KfW lead. “And the question now is whether the same story will apply to euros. Therefore, issuers are trying to get duration while they can.”
Ireland was the first core SSA to mandate a deal beyond the 10-year mark in any of the major currencies this year. It is marketing a 20-year green deal via Bank of America, BNP Paribas, Cantor Fitzgerald Ireland, Danske Bank, Deutsche Bank and Nomura. Portugal is also out with a mandate. The sovereign has hired Barclays, BNP Paribas, Goldman Sachs, JP Morgan, Morgan Stanley and NovoBanco for a June 2038 offering.
EFSF is also lining up an appearance, after sending a request for proposal.