The Italian bank, rated Ba3/-/BB, offered a bullet euro-denominated 2018 at 255bp over mid-swaps on Monday. Despite a juicy 20bp-25bp new issue concession, investors were uninspired and the leads failed to cover the deal, achieving a book size of only €450m.
Market sentiment was not strong on Monday and even Commerzbank, a quality name and a regular issuer, failed to attract much demand. However, investors in German senior bank debt have been spooked by the fact that it can now be bailed-in in the event of a bank default.
The added risk, as well as the possibility of ensuing bank downgrades, contributed to a miserly €600m book for the €500m deal.
However, bankers do expect that confidence in the product will return, especially as Commerzbank's deal, despite an early sell-off, is expected to perform in secondaries.
Caveat vendit, buyers elsewhere
The problem for double-B rated names is more fundamental. There is no natural investor base for the product at current valuations. Either spreads need to widen or banks need to be upgraded.
With rates so low, the hunt for yield has compressed spreads by hundreds of basis points. Debt from Banco de Sabadell, which was issued at 223bp in 2013, dropped to below 100bp in January this year.
Buyers have simply moved elsewhere. Traditional high yield investors can find much more spread for the same rating by buying corporate debt.
In addition, many FIG investors are limited as to what non-investment grade paper they can buy, and with such a healthy pipeline for tier two and additional tier one paper, most are choosing to deploy cash into those higher yielding products.
This was the case for Banco de Sabadell which pulled a four year senior bullet in July. The Ba1/BB+/- rated bank went out with price thoughts of 140bp over mid-swaps, which offered a 40bp-50bp concession. But again, investors failed to bite and the leads decided to “delay” the deal until the end of summer.
Of course there are others in the buy-side who revel in higher beta products but the likes of hedge funds were badly burnt by the underperformance of Banco Popolare’s trade in July.
The issuer printed €1bn of five year debt at 2.75% on July 21. Investors piled in leaving €4.5bn of orders to make the most of the 20bp concession. But the trade tanked immediately and has consistently underperformed in the secondary market.
The trade was priced at 99.549 and was around a cash point lower after the announcement of the new trade having dropped from 99.450 on Friday 11 to 98.434 on Tuesday.
And in case anyone hadn’t learnt their lesson, Monday’s 2018 deal was 25bp wider in secondaries by Tuesday morning. So much for once bitten.
Access few areas
In August, Fitch downgraded Banco Popolare to BB which is likely to result in a downgrade of the issuer’s covered bonds to BB+. However, much to the surprise of analysts, nearly 100% of investors voted in favour for Banco Popolare continuing to operating as the account bank for its programme.
Not only are investors taking on the increased risks of a lower rated bank, but they may also be forced to sell the bonds should the downgrade occur. As one analyst said, it is like turkeys voting for Christmas.
The whole issue lacks clarity but analysts suggest that investors were not fully aware what they were voting for when the decision was made.
Whatever the outcome, bankers agree that investors would be highly unlikely to buy covered bonds from the issuer, at least until the issue is resolved.
It seems that the double-B rated banks might just be the one group of borrowers kicked out of the low rates party, however long it is set to last.