When waiting is the best strategy
FIG issuers should not feel they have to print just because the summer is coming
Despite the oft repeated syndicate desk mantra of “print if you can,” which has now morphed into “better print now as markets probably won’t get better,” banks should not concern themselves with rushing to the primary market ahead of the summer break. This is especially relevant for riskier and more expensive subordinated deals.
When bank treasuries devised their funding plans for 2022, the latter half of the calendar was punctuated by a series of unknowns.
The first Federal Reserve rate rise was expected to arrive in June, with the ECB following later in the year or even in early 2023. Meanwhile, central banks were set to pare back their asset purchases from the second quarter onwards.
However, many of those unknowns are now known. The Fed and Bank of England already set off on their journey towards higher rates earlier this month, with the ECB expected to join them at its July meeting.
Of course, there are still curveballs that could catch the market by surprise, like Russia’s shock invasion of Ukraine in late February, which exacerbated supply side inflation. Meanwhile, the slowdown in the eurozone economy throughout the remainder of the year could place bank balance sheets and funding conditions under stress. But even then, these have now evolved into known risks.
Banks had been ushered to print sooner, and some could argue rightfully so, to avoid this concentrated streak. The market backdrop has completely transformed, however, following the tumultuous repricing of last week.
The fog has lifted and there is better visibility ahead, even if what is there may seem unpleasant.
A game of two halves
However, some issuers appear still keen to pile in ahead of the much-deserved summer break. So, what’s the rush?
Across the first two days of this week, eight banks placed covered bonds totalling €5.5bn. And there are plenty more set to arrive in the coming days.
However, the rush here is more obvious — catch the ECB bid before it shrinks below the current 30%. Some are afraid that, in the worst-case scenario, the central bank’s primary participation in the covered bond market might evaporate for deals settling in July.
This is not the case for unsecured debt. Why should these issuers join the fray amid a market chatter of senior and subordinated mandates poised to surface over the coming weeks?
Although the advice to bond issuers is nearly always carpe diem, perhaps banks funding teams might consider its antithesis: carpe noctem or seize the night.
Just like how the day is divided into two, so too is the year. For some borrowers, making use of all available time, instead of rushing in ahead of the end of the first half, might prove a prudent endeavour.
There are just over 20 working days left until Bastille Day in mid-July, which for some signals the start of the summer break. And there are no guarantees that every one of these will provide an accessible window.
Last week, for example, was anticipated to be among the busiest of the year, but the rampant rates sell-off entombed the primary FIG markets in a temporary slumber. And the unsecured market is still desperately seeking a champion to set the tone, show the way forward and establish a benchmark amid an ever-shrinking issuance window.
Squeeze in, squeezed out
With numerous issuers lining up deals ahead of the summer break, it is unlikely that many will enjoy the luxury of having the market to themselves over the coming weeks, possibly leaving smaller names crowded out of the market.
But, if a borrower was to wait, it might unearth the opportunity to print in a window untouched by competing supply. Many financial borrowers are well progressed in their funding this year, with some — like the French banks — almost done with their annual funding targets.
However, the bulk of this year’s financial supply has arrived in senior unsecured and covered bonds, which at the end of May were up 23% and 147% compared to the same time last year, according to ING research. This has come at the detriment of capital issuance, which has slumped by 40%.
Unsurprisingly, many DCM bankers have flagged that tier two issuance should have a far busier period before the end of 2022. Already, at least four borrowers looking for debt in the format are eyeing the chance to print ahead of the summer break.
But for issuers, avoiding a concentrated issuance rush can only benefit them when it comes to raising more expensive subordinated debt.
Although the market is starting to show signs of recovery from the violent sell-off last week, this pales in comparison to the accumulated spread widening so far this year. With bank spreads still close to their widest levels, no doubt the current market is offering a great entry point for investors.
And as everything has another half, investors’ great entry points are the worst entries for bank borrowers.
Just before last week’s repricing, tier two debt from well-known issuers was offering new issue premiums of around 20bp-30bp. After last week, some of these earlier tier two deals were quoted up to 50bp wider.
With investors unlikely to forego their demand for 20bp-30bp of concession, issuers would need to fork out in terms of wider spreads, even after several widening bouts throughout the year.
So what’s the rush? Bank issuers can still attract investors later in the year. Those borrowers that are considering capital trades might find themselves offering an alluring alternative to senior and covered bonds in the second half of 2022.
Unless there is an urgent and pressing need to raise unsecured funding, banks should wait. And perhaps, the new mantra should now be: “the more expensive the debt, the longer the wait.”