Perhaps the most unexpected aspect of Ontario’s cancelled 10 year euro benchmark on Monday was how little criticism there was for the deal from rival bankers.
No-one GlobalCapital spoke to about the deal felt initial price thoughts were wrong and plenty said the euro market was deep and supportive, after some bulky deals over the past few weeks.
A rare name in the currency like Ontario should have been an attractive proposition, many felt. Overall, the tone was one of bemusement.
There were suggestions that, despite not relying on commodities to nearly the same extent as other Canadian provinces, some investors may have wanted to shun Canada altogether. This seems doubtful — although a rare euro issuer, Ontario has printed in the currency for many years so investors should be familiar with its particulars.
The most reasonable suggestion is that Ontario’s secondary levels were not a good indicator of where a new deal should come. That mirrors a problem that had plagued public sector borrowers for much of this year, with the market taking its time to work out the level of new issue premiums required to get deals over the line after the European Central Bank launched its quantitative easing programme in March.
But it seems there may still be some work to do for issuers looking for the kind of benchmark size that Ontario wanted — every one of its euro syndications since 2009 has been above €1bn — but that are not included on the ECB’s buying list.
Since the ECB started its public sector purchase programme on March 9, there have only been four euro deals of €1bn or more from borrowers whose assets were not eligible for PSPP at the time of issue — and all of them were eurozone based issuers.
In fact, in the little more than two months of this year before QE began, there were more €1bn-plus deals from non-PSPP eligible issuers than after — six in total, three of which were from outside the eurozone, including a €1.25bn 10 year from Ontario itself.
Some SSA bankers and funding officials have long argued that being left off the ECB’s buying list does not adversely affect an issuer’s spreads relative to its nearest peers that are on the list — either because there is an expectation that the ECB will need to eventually grant eligibility to more issuers or because investors cash out of an eligible bond into a comparable non-eligible instrument.
But Ontario’s failure to find enough demand for a euro benchmark suggests that, as an issuer that is unlikely ever to make the ECB’s list, the secondary level distortion still exists for it and other borrowers with no PSPP aspirations.
Last week, many SSA bankers were hopeful that more issuers could look to bring euro deals for the first time — like the Province of British Columbia did last week, although only for €500m — or return to the market after a long time away.
But last week, all the stars appeared to be aligned — from the price benefits relative to dollars, to stability, to market depth.
Ontario’s pulled deal shows that the gravitational pull of PSPP means the Uncertainty Principle still applies to pricing the benchmarks of issuers outside the ECB’s universe.