Greek banks may not have been active in international MTNs meaning the countrys sovereign crisis had little effect on the market but Irish banks were heavy MTN users last year. With all of them now out of the market for the foreseeable future, the MTN world has lost some big players.
"Demand for Irish banks has dried up given the volatility in the credits," says David Morland, director of MTN trading at UBS. "The Irish banking sector will likely be restructured in 2011, but issuance will be difficult until the new banks emerge."
Irish bank issuance peaked at just under Eu2.5bn in March 2007, but monthly volumes have slid steadily since then, reaching an all time low of Eu22m in December 2010, according to Dealogic.
In the weeks running up to the Irish bail-out, Irish bank issuers had to turn to puttable FRNs as a means of securing funding from an increasingly risk-averse investor base. When the dust settles once more, this structure may be the key to the successful re-integration of peripheral credits. "Multi-puttable FRNs are still the most reliable source of access for issuers in crisis, and this is the product that will re-open the Greek and Irish FIG markets once the underlying situation has stabilised," says Chris Hill, vice president of MTNs at Barclays Capital.
In the meantime, it is unclear who will fill the vacuum left by Irelands departure. With the sovereign now on watch for downgrade, Spanish banks may be too risky for some but some bankers suggest Italian banks could have something to offer investors.
"There is a view that Italy is a case apart from the Iberian, Irish and Greek banks," says one MTN dealer. "If you want bank paper that pays a bit of a premium but has a decent credit rating, Italy could be the place to go. That would be great, because the overwhelming focus is on core Europe right now."
Only the best
Eurozone volatility provoked a flight to high quality credits in 2010, and demand for safe haven bank issuers often exceeded supply. Northern European financial institutions such as Rabobank, BNG and DnB NOR Bank were some of the most sought-after names.
"Even though the year was very volatile, if you look at the market in general, our private placement flow was very stable," says Trond Marthinson of DnB NOR. "Investors turn to us during periods of stress, both in covered and senior unsecured formats."
The flight to quality bid, with such a heavy focus on highly rated banks and top SSA names, forced many other banks to seek alternative funding sources.
"The SSA market has been strong since the Greek bail-out," says Morland. "Strong double-A banks have still found it easy to issue senior debt, but some European issuers have had to use their covered bond programmes and issue secured bonds in order to achieve funding requirements."
Despite having climbed since last summer, absolute rates are still low, and investors are turning to structures in the hunt for yield. Many are still restricted in terms of what structures they can take on, but demand for bespoke MTNs increased throughout 2010 and is expected to grow in 2011.
"Structured activity has certainly increased, but in baby steps, as its investor base slowly becomes more comfortable with an asset class that had often resulted in significant pain during the crisis," says Hill. "The simple end of the structured spectrum dominated in 2010, with floored FRNs and CMS floaters proving popular, but structure sophistication will increase in line with investor confidence."
Strong equity performance and equity option volatility encouraged investors to return to equity-linked MTNs, while Taiwanese life insurers continue to drive the callable zero coupon market in dollars.
Meanwhile, low rates, coupled with pressure from the Basel Committee and other regulatory bodies, are forcing issuers and investors alike to opt for longer tenors.
"The average maturity in 2010 was around 5.7 years compared with just over five years in 2009," says Paul Jones of UBS. "This change reflects both the need for investors to move along the yield curve to achieve targets and the shifting of the MTN investor base away from money market investors towards investors with more long-term liabilities."
In an already investor-driven market, lenders gained even more clout in 2010. As investors began to pay attention to credit quality as well as yield, fierce biddings for triple-A names became commonplace, with investors pitching investment banks against each other, driving down margins and creating competition between issuers."The MTN market is a buyers market," says Hill. "And in 2011, the expected increase in borrowing requirements from almost all sectors should continue to keep the balance of power in favour of those with money to spend."