Conventional wisdom dictates that emerging market bonds pay higher returns than developed market ones because of they carry greater risk of default. But it turns out European FIG bond investors do not need to travel as far as the exotic locations of EM for higher yields, and arguably face more caclulable risks by staying closer to home.
That's because EM-like volatility already exists in niche sectors of the European FIG market but with the advantage that it's a sector that is well regulated.
Deutsche Pfandbriefbank has struggled to shake off the effect of its previous exposure to the commercial real estate sector. To tempt investors, it has ben offering high spreads to compensate, even though it announced its exit from the US real estate market a year ago.
On Wednesday, PBB had paid 155bp over mid-swaps for a €500m 4.25% three year senior preferred green bond. OK, it may not match the juiciest yields in EM but this was nearly double the 80bp Slovenska Sporitelna offered on a similar €300m 3.5% four year non-call three senior preferred green bond issued a day earlier.
The Slovakian lender has also found it challenging to raise funding at a tightprice in recent years, thanks to its proximity to Ukraine following the Russian invasion in 2022, relying on private placements and covered bonds. It took until 2023, when it returned to the public unsecured market with a €300m 5.375% five year senior preferred green bond, for which it paid 205bp over mid-swaps, to make its comeback.
In comparison, the restructured PBB, which also boasts a retail bid for its debt as well as German regulatory oversight, may not seem so unappealing for a three year senior risk.
Meanwhile, specialist Italian lender Banca Ifis shocked the market with its announcement on June 25 that its non-performing loan business was up for sale and it reduced its profit outlook for the year a day later. Its shares are down almost 40% since then and its less liquid bonds have also widened.
Its most recent issue, a €400m 4.546% 10.25NC5.25 tier two was quoted on Tradeweb on Thursday at a bid/offer spread of 312bp/291bp over swaps, having been reoffered at 200bp over in mid-January.
Its last senior bond, a€400m 3.625% November 2029 ssuer was quoted at 172bp/153bp compared to the 145bp where it cleared it last July.
There are risks and opportunities for those with informed views — be it for a CRE monoline or southern European NPL exposures — as long as they can stomach the EM-like volatility.
But unlike distant jurisdictions, staying closer to home may provide European investors with outperformance in a regulatory nvironment they are more familiar with and that is undoubtedly robust.
Wide spreads present higher risks, but Europe weathered the 2023 US regional banking crisis relatively unscathed, precisely thanks to its robust bank regulations. Cold analysis will offer calculating investors hot opportunities in the European FIG market.