Buyers of private placements are changing their habits. In their hunt for yield, they are mimicking behaviour seen in the public sector.
The advantages of private placements over public deals — particularly in the current climate — mean that this can only be good news for banks on the eurozone’s periphery.
ABN Amro and ING Bank surprised observers last week by printing large sized 10 year Norwegian krone denominated deals. It wasn’t the names that had MTN dealers spitting coffee over their term sheets in surprise — it was the fact that the deals were unsecured.
Norwegian insurance companies — the usual suspects when it comes to these deals — typically only buy triple-A rated debt, such as agencies and covered bonds. So the recent deals are a sure sign that investors are treading where they would normally fear, in search of yield.
ABN Amro and ING are not quite on the periphery, but they do represent a move down the credit curve. The responses to their deals show that private placement investors are moving in the same direction as their public bond counterparts.
Public investors, buoyed by news of the ECB’s latest bond buying programme, have been buying periphery eurozone debt again. Unsecured and covered deals for Intesa Sanpaolo and UniCredit in the past couple of weeks are testament to that.
Even Banca Monte dei Paschi di Siena, Banesto and Banco Sabadell have been able to come to market. Last week, the Italian bank sold an unsecured deal — albeit only just subscribed — while the two Spanish banks printed covered bonds.
But despite that welcome access, those tier two banks had to pay up for the pleasure. Opting for the private placement route would alleviate some of that cost pressure. The lack of a new issue premium and the ability to tailor fit a deal to investors’ specifications mean that selling privately could be an attractive source of funding.
The lack of execution risk in private placements also means issuers can avoid the disaster of launching a public deal on the same day that more bad news comes on the eurozone sovereign debt crisis.
Conversely, in windows of positive sentiment around the crisis — such as now — banks could quickly launch nimble trades. MPS, Banesto and Banco Sabadell all have medium term note programmes in place, so there would be limited set-up costs involved.
Norwegian insurance firms are likely just the tip of the investor base iceberg. It’s time for banks to dust off their MTN programmes, call up their dealers and find out where these new frontiers lie.