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People and MarketsCommentLeader

Don't nip off the NIPs

Bank issuers should not skimp on the new issue premium — it’s all FIG investors have to cling to in the absence of liquid secondaries

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The new issue premium, that extra layer of yield borrowers pay on top of a bond’s fair value price, is arguably the most important number in the current credit markets. It is especially relevant for investors in financial institutions' debt.

Any borrower’s aim is to lower its cost. While tightening the overall spread is crucial, it is not a bank issuer’s raison d'etre. A bank should aim to have unhindered primary access throughout cycles and not a one-off tightly priced deal.

Investors clearly demonstrated their desire to buy FIG assets, even if the stress in the sector has not fully evaporated, when they absorbed €13bn-equivalent of unsecured debt in euros and sterling this week. A number of milestones since Credit Suisse’s fall were retaken — extending senior duration, the first insurance restricted tier one capital and the first bank tier two trade in euros — all suggesting that more issuers are likely to tap the market.

As they prepare to print, issuers should not underestimate the power of the NIP, even if they can ride on positive currents that will allow them to squeeze it

The secondary market, typically the prime building block of fair value estimation, has had very little liquidity in recent years. With thin trading in either direction, a bond’s price could gap out both ways. That makes secondary prices less relevant for finding the fair value of a new bond, especially for less frequent issuers.

A reasonable NIP could allow investors to stomach some valuation swings and hold on to their credit convictions. It will also smoothen a deal's secondary performance in thin trading.

And more importantly, if investors have a meaningful cushion they will likely be more willing to support a new deal, assuaging the price discovery.

In the current finely balanced market, issuers should not skimp the NIP for a one-off gain that may dim their future market access.