The European financial institution bond market suffered an ominous start to 2024 when secondary spreads widened violently on the second trading day of the year — but all was soon forgotten as investors swiftly piled into FIG assets, setting the tone for a strong first quarter.
While January turned out to be a solid month for FIG issuers to raise debt, February was even better. New issue premiums virtually evaporated for most deals, according to GlobalCapital’s Primary Market Monitor.
FIG euro and sterling unsecured average new issue premiums (2024)
Source: GlobalCapital’s Primary Market Monitor
The average new issue premium on senior benchmark-sized bonds was 10bp in January. It then lunged to 1.1bp in February as only a handful of transactions paid positive concessions and several were printed in negative territory.
It was a similar story in subordinated debt, where over the same period average concessions declined from 10.6bp to 4.2bp.
Technical factors proved key in driving down premiums. A huge influx of cash flowed into credit funds, sometimes because of a build-up of cash, the result of the higher coupon payments of recent times.
The pace of issuance was slower compared with the previous year. There was total volume of €82bn-equivalent in euro and sterling benchmarks issued across the credit stack in January and February, down from €103bn in 2023.
March brought more borrowers looking to take advantage of the favourable funding conditions. By the end of the first quarter, year-to-date volumes in unsecured FIG issuance had closed in on the 2023 numbers at about €110bn-equivalent.
They say that all good things must come to an end. That proved to be the case in April as FIG issuance ground to a temporary halt after the repricing of interest rate expectations following strong US employment data.
Just €2bn of unsecured FIG benchmark issuance was printed during the third week of April, the lowest weekly volume all year up to that point. When issuance resumed later that month, demand was tepid. Santander moved first, braving the market with a €2bn dual tranche senior that paid a 10bp premium on both legs — a sharp rise from the average 2.1bp paid on senior deals earlier in April.
As investors’ conviction over the certainty of ECB rate cuts fell, so their appetite for senior paper waned and demand for higher yielding bonds increased. Issuers responded in kind and the volume of tier two euro and sterling notes sold in the second quarter rose to €16bn-equivalent, up from €12bn in the first quarter.
A lull in issuance over summer ended in the third week of August with the resumption of primary market activity — earlier than usual.
During the subsequent four weeks FIG issuers collectively raised €36bn-equivalent from unsecured bonds, about 45% higher than the volume recorded the previous year, amid a desire to get ahead of potential volatility in the run-up to the US presidential election on November 5.
During this period, appetite for additional tier one paper was robust from the outset, with the average bid to cover ratio for euro and sterling AT1s landing at 7.6 times the deal size for the first week of September. But as time passed, so did investors’ appetite for the most subordinated debt banks offer. The average subscription ratio for transactions that were priced during the second half of September fell to just 1.98 times deal size.
Market participants suggested that the large volume of AT1 issuance in a short period of time had weighed on the market, while the appearance of corporate hybrid issuance had drawn some investors away from the FIG market.
After a brief pause leading into the US presidential election, issuance swiftly resumed after a decisive win by Donald Trump. The primary market appeared to be ending the year as it began — with issuers paying minimal premiums and appetite for all and everything FIG.
Although premiums oscillated throughout the year, issuers’ pricing power remained constant: the average tightening of spreads through the first three quarters was 31bp, 30bp and 29bp respectively, and 28bp through October.