The European FIG market went through serious turbulence last week as two assets classes in the unsecured part of the capital structure were seriously shaken, resulting in the worst week for unsecured FIG deal execution in recent months.
The sour reception for some of last week's deals pushed market participants into soul searching about how to recapture the former glories of a market that has performed well all year for unsecured deals of all stripes.
The answer is clear: banks keen to issue in the remaining weeks of the year have to start paying new issue premiums.
Tuesday's US elections are arguably the year’s biggest, most unpredictable market-moving event. It is a very close call between the two presidential candidates.
Granted, after the US elections, as well as the Federal Reserve meeting later this week, there is a chance that market tone may change. But it is more likely that it will not.
The macroeconomic backdrop in Europe, driven by weak growth and expectations of interest rate cuts by the European Central Bank, combined with spread tightening for most of this year, point to sentiment remaining the same.
With major central banks dictating the market trajectory, while funds’ credit inflows grow, there is a danger that European banks may miss out on the opportunity to pre-fund, should they try and skimp on new issue concessions.
Far more than elections
Investors have ever less reason to buy. Added to the macro gloom, FIG bond spreads have been tightening all-year long. Valuations on subordinated debt have been questioned numerous times, yet tighter and tighter deals kept appearing while investors were keen to take more higher yielding credits before rates were cut further. It is now the case that senior preferred debt has been issued recently within the proximity of covered bond spreads.
As they look to book their annual returns and take less risk, it is only natural to demand concessions from issuers.
The super slim oversubscription on LBBW’s €750m no-grow perpetual non-call 6.4 year additional tier one (AT1) deal last week was in shocking contrast to recent similar trades . The deal ended with just €825m of orders, raising questions on whether other highly strategic trades will be at risk.
At the same time, the heavy order book attrition in the senior market has also raised red flags. Tightly priced senior preferred and non-preferred deals from Mediobanca and SEB showed that investors can be price sensitive there too.
Both issuers ended up raising just €500m, though this was Mediobanca’s intention from the start. And while the Italian bank printed at fair value and kept around €1bn of its book from the €1.9bn peak, the tighter SEB trade suffered more aggressive attrition. The Swedish lender was spotted with a €740m final, though unconfirmed, book after reaching €1.5bn at peak, when it priced with up to 5bp of negative new issue premium.
These are good funding levels, no doubt, but these deals have shaken sentiment for others looking to issue, with some market participants talking of a “negative spiral”.
The solution lies in another trade from last week — Barclays’ well-absorbed €1.25bn January 2036 non-call 2035 holding company senior outing. The issuer opted to get size and duration, and for that it offered about 5bp of new issue premium, gaining praise from rivals for its execution as well as a €5.4bn book.
Squeezing deals over the line is all very well. But investors can only be pushed so far.