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Market volatility opens windows for financial MTNs

Private versus Public

FIG be nimble, FIG be quick, FIG use MTNs while the windows don’t stick

The choppy conditions brought forth by last Thursday’s ECB meeting have kept senior financial funders on the sidelines.

Senior and subordinated debt indices are sitting at their highest levels since the US election as the market digests the fallout from thecentral bank’s comments, and as a result the euro market has gone almost a week without a benchmark unsecured FIG deal.

When the market is this volatile and uncertain, it's a good opportunity for credit issuers to make the most of alternative funding opportunities, in particular the medium-term note (MTN).

These smaller sized deals are well suited to a 'windows market', helping FIG borrowers chip away at their higher 2022 funding needs, as they ween themselves off years of cheap central bank funding.

ING expects financials to raise €400bn in covered, senior unsecured and subordinated formats in 2022, up from €374bn last year and €332bn in 2020.

Although the bulk of this will likely arrive publicly in benchmark format, MTNs still have a valuable part to play. Last year, , financial issuers placed 674 MTN bonds totalling over $44bn, according to Dealogic.

Size is the obvious limitation of these deals, which hardly ever hit benchmark scale. But, what they lack in size, MTNs more than make up in agility.

Instead of waiting weeks for volatility to settle and the right window for a benchmark public deal to avail itself, borrowers can slip in and out of narrow cracks with lithe MTNs, eroding their funding requirements over time.

These smaller, nimble deals arguably come with less execution risk than a public transaction. At its heart, the MTN is a bilateral product arranged away from the public eye, as opposed to a drama played out in front of hundreds of investors. And there are fewer moving parts that must fall into place to ensure a successful trade.

But that doesn't mean these deals can't be interesting. Since an MTN is usually sold to a single account or a very small number of investors in dialogue with the issuer through an intermediary bank, there is less pressure to cater to a wide range of tastes with bland fare.

Given that many deals arise from reverse inquiry, there are plenty of opportunities to tailor an off the run instrument that matches the appetites of certain investors with the specific needs of issuers otherwise unsatisfied by what is already available in the public market.

For instance, while senior paper beyond five years has struggled to gain traction in the public market in recent weeks, requiring double-digit premiums in some cases, there is a subset of investors that would be more than happy to buy paper with even longer tenors.

As yields climb back above 1% at these tenors, more and more accounts will return to them, and MTNs offer a flexible way to greet them as they arrive.

With less points of failure, MTNs are well suited to a market where the windows of stability are a few and far between.