A tale of two cities: New York and London slug it out
Last week over $30bn of high grade bonds were priced in the US. The euro market, by contrast, has dwindled to a trickle. US bankers are delighted at this sign that the US market is still streets ahead of Europe in maturity. But a hefty Eu3.5bn issue by GlaxoSmithKline today shows the picture may be more complicated.
London has been strutting around like the cock of the walk for a few years, proclaiming itself as the world’s new pre-eminent financial centre.
The London Stock Exchange surpassed New York in attracting IPOs, and the euro had become as deep a funding currency as the dollar, bankers claimed.
New York has had its tail between its legs. Sarbanes-Oxley was a huge pain and there was no doubt it had put off foreign issuers.
Wiser observers could see that writing off New York was folly, but pride does have a way of going to people’s heads. Sure enough, New York recently regained its lead in IPOs.
There are much bigger forces at work here than those that drive the weekly ups and downs in the bond market.
But this background of the rivalry between the two financial centres was very much in New York bond bankers’ minds this week.
Last week, over $30bn of high grade bonds were priced in the US. In euros, there were less than Eu3bn, and half of that was one deal from Oesterreichische Kontrollbank, a government agency.
The market for corporate and financial institution bonds in euros appeared to have crumbled to dust, as investors shut up their books until January. Gloom pervaded the market.
Meanwhile, the US market was firing on all cylinders, with a great variety of deals from issuers that had accepted the new pricing levels and were happy to sell bonds that investors lapped up at higher spreads.
“Hey, this is a bond. That’s what we do, we sell bonds,” was the sarcastic comment of one syndicate banker in New York this week.
Only two weeks ago, the US market was in poor shape, with talk that it could close up until the New Year. But it has sprung vigorously back since the Thanksgiving holiday.
Bond bankers in New York’s reaction to that recovery, while the euro market has sunk further into December hibernation, can be summed up as: “You said London was the new leading financial centre, more innovative, and the euro was the equal of the dollar in the bond market? Yeah, right!”
The pugnacious sense of vindication is understandable, especially as the US has been pounded by bad news for months about the falling dollar and its domestic economy.
Europeans may have little sympathy for this renewed sense of alpha male-hood from the land that gave the world subprime.
However, many US bankers’ response to that is along these lines: “At least we’ve declared it. We may not know how big the problems are, but we know where it is. You in Europe are still in denial, and if you think you’re better off, especially in the UK, you’re in for a nasty surprise.”
US bankers have been particularly irked by criticism from some of their European colleagues that by pricing deals at the wider spreads investors now demand, they have in some way let the side down, by repricing the market at a wider level.
“What is more European, what is more condescending, than the view that we’re validating the market level?” asked one New York syndicate banker. “The market is where the market is.”
But behind the rivalry, what are the real differences between the two markets?
Last week, it seemed that the big problem with the euro market was that investors had been scared off by a few widening new issues and were not willing to buy new deals, almost at any price.
Several bankers in London have told EuroWeek that some investors were anxious that no deals should be launched, even if they did not buy them, because new issues at wide levels would force them to mark their whole portfolios to market at lower values at the end of the year.
Bankers said some investors requested wide spreads when offered new deals, specifically to deter new issuance.
Some investors, for instance, thanked Telekom Austria for not coming to the market.
A syndicate banker in New York echoed this view, arguing that US investors had a more mature and realistic approach. “Europeans have a very hazy idea of marking to market,” he said.
If US funds are more realistic about marking to market, they are likely to realise there is no point hanging back from the market — they might as well buy deals at wider spreads.
Support for the view that European investors, rather than issuers, are to blame for the market’s paralysis, came from the fact that two European issuers, Marks and Spencer and Barclays, were among the flock of borrowers in the US market last week.
The UK retailer, rated Baa2/BBB, made a successful debut in dollars with a $500m 10 year and $300m 30 year bond.
Citigroup, Morgan Stanley and Royal Bank of Scotland priced the paper at 240bp and 290bp over Treasuries. Although there was no credit default swap comparison on the 30 year tranche, the premium conceded on the 10 year was 80bp over CDS.
This is hardly the story of an issuer reluctant to pay up. Sources close to M&S said the issuer, which is carrying out a share buyback programme, had been looking at the US market for a while and had planned to diversify its investor base there.
However, this afternoon (Tuesday), pharmaceutical group GlaxoSmithKline steamed into the euro market to price a Eu2.25bn five year and Eu1.25bn 10 year offering that was warmly received.
Credit Suisse, Deutsche Bank and Lehman Brothers attracted an order book of over Eu6bn.
They priced the five year tranche at 85bp over mid-swaps, conceding a 45bp premium over CDS, which was quoted at 40bp today, though it had traded in the mid to high 20s only last Thursday.
The 10 year tranche came at 115bp over mid-swaps. Glaxo’s illiquid CDS for this maturity was closer to 55bp. One of the leads said that instead of that, they looked for a reference point to where double-A CDS curves were for this maturity and conceded a 30bp premium over that.
A syndicate official working on the deal said real money investors had played a big part in the deal, including insurers and asset managers from all over Europe.
So either the argument about European investors trying to hide their portfolios from real marking to market has been overdone; or they have given up on the effort; or Credit Suisse, Deutsche and Lehman have been very clever at winkling out the few investors that were prepared to play ball.
What about the issuers? GlaxoSmithKline has also bucked a trend, by bringing a deal.
“No one in their right mind would have thought last week that Glaxo would come to the market and concede that kind of premium,” said a syndicate banker away from the deal.
He put the blame for the euro market’s somnolence squarely with issuers, obsessed with their funding levels versus swaps, and hence reluctant to issue.
It is certainly true that industrial companies make up a much smaller part of the euro bond market than they do of the dollar market. That means swap-driven issuers like government agencies and banks play a correspondingly bigger part.
But there is also good reason to think that European industrial companies’ behaviour may be driven by levels against swaps. Bank finance — all of it floating rate — still accounts for more than half of European companies’ debt. In the US, it is well under half.
That means European companies do not rely so heavily on the bond market — if it is unfavourable, they can always go to their friendly banks for money.
For one syndicate banker in London, European companies have yet to realise that “Libor is broke”. They should wake up and start using the bond market, and paying the levels the market wants, he believes.
And with the rally in government bonds since June, issuers can fund very attractively. Anheuser-Busch, the US brewer, launched a $500m 10 year bond last week at 183bp over Treasuries.
In February, it sold a similar 10 year bond at 83bp over. Anheuser-Busch paid a 40bp new issue premium over secondary trading levels of its debt to issue the new deal — but in absolute yield terms, the funding it actually obtained was 5bp cheaper than in February.
GlaxoSmithKline appears to have made a similar calculation.
There is no one answer to why the US and euro bond markets remain so different. One thing is certain: the credit volatility of 2007 has given all market participants many opportunities to see each market in new lights, and deepen their understanding of their relative strengths.
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