Banks have had one of the slowest starts to a year since the financial crisis in terms of euro issuance, with only €44bn having been priced in 2016 so far. More than €56bn had been issued by the same point last year and more than €59bn in the year before that.
But concerns about slowing Chinese growth, the price of oil, and banks’ abilities to pay coupons on their additional tier one securities all subsided this month, feeding a rapid acceleration in the pace of issuance. Indeed, more than half of this year’s total issuance to date was issued in March — with €22.85bn having been printed across all tiers of the capital structure.
The European Central Bank played its part on March 10 when it gave banks more access to cheap four year funding (TLTRO II) and extended its asset purchase programme to corporate borrowers.
Spreads on subordinated bank paper tightened by up to 50bp in the immediate aftermath of the meeting and, despite weaker trading sessions on Monday and Tuesday this week, bankers have remained positive about the direction in which credit prices are headed.
“Investors were caught off guard by the ECB meeting, having been cutting exposure and building cash balances for the past six months,” said analysts at JP Morgan. “We therefore think that some funds would have been underweight into this rally, and will be playing catch-up with their benchmarks for the remainder of the year.”
The pursuit of clarity
As long as issuers can avoid the volatility around the UK’s EU membership referendum, which takes place on June 23, the second quarter should provide a good opportunity for financial institutions to make up for unusually low issuance volumes in January and February.
In particular, banks will be looking to make significant ground on meeting the Financial Stability Board’s TLAC requirements, which come into full effect in 2019.
“There is no rush for banks to issue, but the clock is ticking on TLAC,” said Adrian Docherty, head of FIG advisory at BNP Paribas. “A huge volume of capital still needs to be raised, and not just to fill gaps, but also to make sure refinancing volumes do not become unbearable in the future.
“In other words, if you are issuing shorter dated paper that counts towards your capital base, it will create a significant refinancing requirement, which will have to be factored into medium term plans.”
Swiss and UK banks have a long established holding company/operating company structure in place, but banks in some EU jurisdictions remain uncertain about how they will tackle their TLAC requirements.
That puts France in the spotlight. The country is looking to make progress on its draft law, which provides for a new layer of senior debt, dubbed 'tier three' in some corners of the market, which is subordinated to other senior obligations.
The time frame for passing the new law remains uncertain, but market participants think there is a chance that investors will have welcomed the first tier three bond by the start of July.
“Even if we have not had vast amounts of capital issuance by the end of the second quarter, we could have a larger set of countries where banks are actually able to start building their TLAC bases,” added BNPP’s Docherty.
In the meantime, market participants suggest tier two issuance could increase if banks with less regulatory certainty decide to take advantage of stable market conditions.
Further down the capital structure, additional tier one is also approaching a greater level of clarity as major regulators take another look at Pillar 2 requirements and the conditions behind coupon payments.
Despite concerns about the viability of the deeply subordinated bank bonds from some corners of the market — voiced most strongly in February when the asset class sold off sharply in February — one banker argued on Wednesday that recent signals from the European Central Bank showed their “clear desire” to make AT1 work.
“It is difficult to predict how markets may react from one day to the next, let alone three months in advance,” said one FIG syndicate banker. “But there is good reason to be bullish on the prospect of future issuance in the subordinated debt markets. Both UBS and BNP Paribas have shown this month that investors still want to buy additional tier one products. It is only a matter of time before the market opens back up in euros.”