The dollar market is more than a fistful of funding

After having been shut to most foreign borrowers of all shapes and sizes for months, the single largest bond market has reopened to the world.

The dollar market welcomed back international issuers with a bang last week: from supranational, sovereign and agency borrowers to financial institutions.

Now, European banks should seize this opportunity to alleviate the pressure on the euro market after months of pounding investors to advance their annual funding needs.

The stress in the banking sector started in the US with the collapse of Silicon Valley Bank.

As worries about the health of the US regional banking sector spread like wildfire, dollar investors' positive sentiment nosedived. Many were unable to embrace regional banks’ debt and appeared to have had limited appetite for the broader foreign FIG universe.

But as the primary market reopened in earnest to US regional lenders last week, foreign issuers also rushed to cash in on the improved funding dynamics in dollars.

During the period of banking stress, the euro/dollar cross-currency basis swap shifted unfavourablly for dollar issuance.

Or, to put it differently, it became more attractive to print in euros. Even big global dollar funders like the Korean quasi-sovereign duo of Export-Import Bank of Korea and Korea Development Bank favoured the single currency.

As the basis finally improved, a wave of European agencies stepped back to dollars to print $5.25bn last week. After several months of absence, or even years for some SSA borrowers, they were able to attain arbitrage versus euros at the short end of the maturity curve.

Similarly, foreign banks had also largely shunned the expensive dollar market for months, as a funding official at European lenders told GlobalCapital at the time.

It was only last Monday that BNP Paribas ventured into the market for the first time since January. As it raised $1.5bn of senior funding, it also became the first eurozone bank to issue a Yankee since the collapse of SVB.

Garnering exactly how unfavourable dollar funding became is glaringly obvious when looking at the scarcity of foreign issuance in the wake of SVB's demise.

At $140bn, as of June 13, Yankee FIG volume this year has been almost 25% than during the same period last year, according to Dealogic data. This was also some $13bn below what foreign banks raised during the same period in 2021.

SSA borrowers, including emerging market issuers, have fared better. To date they have raised $183bn, or about 45% more than the same period last year, Dealogic data show.

But this volume, for both developed and EM SSA issuance, is still below the $193bn printed during the same period in both 2021 and 2020.

And looking back at foreign FIG issuance, European banks' absence between SVB’s collapse and early June stands out. Only Barclays made an appearance with a $4bn dual-trancher, on May 2.

Meanwhile, heavy part of the Yankee FIG issuance came from Australian and Canadian banks opting to take advantage of the large funding volume the market offered.

It is clear that European banks are trying to regain their lost ground in the dollar market, it is no coincidence that they all re-entered the market last week. Five lenders raised a combined $6.7bn in senior funding, including BNPP's deal.

But aside from the sheer size that dollar issuance can provide, predominantly targeting US onshore accounts, it is also offers strategic funding.

HSBC Holdings kicked off this week's issuance as it looked at shoring up its tier two capital. The deal was launched into marketing during Asian hours, where offshore accounts with dollars have a strong familiarity with the name, but the trade was only priced during US hours.s

Thanks to the Stateside demand, HSBC was able to rein in the price of its $2bn 11 year non-call 10 subordinated debt by 30bp from the initial guidance to land it at US Treasuries plus 280bp. This spread left virtually no new issue concession.

But arguably, the deal that most visibly illustrated the strategic importance of the dollar market was Intesa Sanpaolo’s foray on the same day.

The Italian national champion raised $2.75bn from its senior outing, comprising a $1.25bn 10 year senior preferred note and a $1.5bn 31 year non-call 30 non-preferred piece.

At Treasuries plus 390bp, Intesa appears to have paid up for its ultra long foray versus its hypothetical euro levels. But these are only theoretical levels as this kind of long dated funding is only available in the private placement market and at far smaller volume, as confirmed by a lead manager on the deal.

The Italian bank has made its decision, and what it found in the US was clearly compelling enough for it to lock in this duration at that price.

Other European banks should take heed.

Euro bond investors, similar to other markets, are currently showing appetite for risk. But so are dollar buyers and they often have deeper and broader pockets.

In a bid to lower funding cost by not going through the unfavourable basis, European lenders have too heavily relied on home ground.

Now that the market is open they can finally ease the pressure and diversify into the strategic greenback. They should step up Stateside issuance while the relative value is in their favour and while sentiment holds. After all, the dollar market too has limitations and its investors a tolerance for risk.