Rabobank

Spreads in the financial institutions bond market have tightened as investors pack their bags for the Christmas holiday period, but bankers warn that this does not necessarily reflect how conditions will look in the new year.

For public sector issuers, niche currency deals have offered attractive opportunities for arbitrage funding, with spreads into euros and dollars spurring on demand this year. Meanwhile, strong investor appetite for green paper has seen niche shoots blossom throughout 2019. Frank Jackman reports

Navigating the covered bond market will not be without its challenges in 2020. The Targeted Longer Term Refinancing Operation (TLTRO), European Central Bank deposit tiering and the Covered Bond Purchase Programme have collectively distorted the market, but added to this concoction is the impact of negative interest rates. Against this backdrop issuers, investors and investment bankers gathered in Munich in November to discuss the outlook for covered bonds. It is likely that new issue premiums will gradually tighten, but the path is unlikely to be smooth. January is typically the busiest month, but in 2019, issuers that funded this early paid the highest spreads. And, with the ECB expected to buy in the region of €4.5bn covered bonds a month, issuers will not feel compelled to move early. But the ECB monetary policy has unwelcome implications. Covered bonds have begun to lose value against government bonds, and this will extend if the ECB is unable to loosen restrictions on government bond purchases.

European banks no longer really have to think about building up layers of additional tier one debt. All of the focus has shifted to managing and refreshing this capital layer, and taking full advantage of a ferocious hunt for yield. Tyler Davies reports

Activity is set to heat up in the additional tier one (AT1) bond market in 2020, with as many as 22 bonds approaching their first call dates. Market participants appear confident that conditions will allow banks to refinance and incentivise them to do so.

The fight to influence the way in which EU lawmakers implement the final Basel financial rules is heating up towards the end of 2019, with lobbyists tussling over the potential impact on the European banking sector.

European insurance companies have limited refinancing needs in 2020, but analysts say that the sector will take advantage of market conditions to clean up capital structures for Solvency II. French insurance firm Scor this week was looking to beat the rush with a tap of a restricted tier one (RT1) bond.

Bank capital experts were taken aback this week after UniCredit suggested that it would use subordinated debt to count towards its Pillar 2 capital requirements — a development that, if copied, could lead to a surge in the supply of additional tier one (AT1) and tier two bonds. It could also help financial institutions offset the negative capital impact of Basel IV. Tyler Davies reports.

Investors in the financial institutions bond market have not had much chance to invest in UK credit this year, especially in the euro market in light of the political uncertainty in the country. Much of the supply next year will depend on the UK general election results next week.

Grenke on Monday announced new plans for additional tier one (AT1) bond on Monday. The bank and leasing company could be looking at a small issuance window for its offering, with DCM officials predicting an early end to the year for deal flow.

Financial institutions bond bankers expect that new deal flow will come to a standstill in the primary market at the end of next week, as investors close the lid on an agreeable year for returns.

Commodities company Mercuria has closed its annual borrowing at a size of $1.2bn after 24 banks joining the deal during general syndication.