By the close of business yesterday (Thursday) financial institutions had launched Eu32.5bn equivalent of senior and subordinated debt.
The vast bulk was senior paper, with almost Eu30bn of new issues printed by Thursday. For comparison, the same week last year produced Eu11.5bn.
Despite the onslaught of deals, there were no casualties, and bankers were staggered by the sheer amount of demand from investors.
"We thought we had achieved a high point last year in terms of total volumes and that it was always going to be a challenge to beat those levels," a deal originator in London said. "However, demand is easily outstripping supply, deals are going extremely well and are all massively oversubscribed."
Another syndicate banker said: "There is a distinct lack of yieldy product out there away from financial institutions paper. There has hardly been any corporate issuance since the beginning of the year and single-A bank paper is a good opportunity for investors to get some positive carry."
Investors see deals as good value, even though many issues have been priced at tight levels, in some cases flat to or through the issuers' secondary spreads.
One such deal was a Eu750m three year issue by LeasePlan Corp, the Dutch car finance group. Barclays Capital, Citigroup and Landesbank Baden-Württemberg priced it at 20bp over Euribor, inside where Leaseplan's October 2009 paper was trading, at 20.5bp.
However, not every market observer is optimistic. Some bankers predict that the party is about to fizzle out. One syndicate manager in London said: "This window of great demand and depth in the market is probably limited and somebody won't be in the chair when the music stops."
Despite these misgivings, issuance surged all week. "There was about Eu16bn of new issues priced on Tuesday," said a London banker. "What was even more remarkable was the fact that every single deal traded up in the secondary market. It was a truly massive day."
While the euro market soaked up the largest share of supply, the sterling FRN sector was also particularly active. "There has been over £5bn of issuance in sterling floaters since the beginning of the year. This is twice as much as January last year," said a syndicate manager in London. "It's the biggest start to the year that I can remember."
This week £1.4bn of senior FRN issuance will come to a close in sterling, with the pricing of Spanish savings bank Caja de Ahorros del Mediterráneo's five year deal through ABN Amro and HSBC at 17bp over Libor.
Sterling investors greeted debut issuers with open arms, including US bank Washington Mutual, which priced its first senior sterling FRN, a £500m five year deal at 22bp over Libor.
While it is not unusual for banks to launch a heavy burst of senior FRNs, market participants were struck this week by the quantify of fixed rate deals.
The widening of swap spreads was one trigger behind issuers' decision to adopt the format. Expectations in Europe are that the tightening cycle will continue and that rates could reach 4% by the summer.
A sharp widening in swap spreads in the last two months, coupled with rising fixed rate bond yields, has opened a gaping arbitrage window for banks to issue bonds with fixed rate coupons that tempt investors, while obtaining a keen cost of funds relative to swaps.
Since the beginning of December, 10 year euro swap rates have moved from a tight of 3.9% to just above 4.25% this week. Seven year rates have also widened from 3.8% at the beginning of December to around 4.2% this week.
A similar move has been happening in the five year area and one banker in London said the last time swap rates hit those levels was the fourth quarter of 2002.
Costs of funding narrow
As a result, issuers' funding costs have tightened enticingly. For instance, Goldman Sachs, which last issued a 10 year fixed rate euro benchmark in January 2004 at 51bp over swaps, was this week able to bring a new Eu1bn 10 year at 38bp over, while offering the same spread over governments, give or take 2bp.
The issue, which also included a Eu1.5bn 10 year FRN tranche, pulled in more than Eu7bn of orders.
Citigroupmade a similar outing with a Eu1.5bn 10 year deal. "Our last 10 year in euros was an FRN, which we did a year ago at a reoffer of 21bp," said Charles Wainhouse, head of capital markets at Citigroup treasury. "One year on, we were able to bring a fixed rate deal at 20bp, which was interesting in terms of valuation, since we had seen a snowstorm of seven year issues pricing at 18bp.
"Under Basel 2, Citigroup's risk weighting will move down from 100% to 20%, as we are blessed with a double-A rating," he added. "Some institutions are positioning themselves ahead of the implementation of these rules, which meant that we had significant interest from institutions that were new to our name." Investors put in Eu2bn of orders for the deal, which was priced at the tight end of guidance.
Merrill Lynchwas the precursor of the issuance from across the Atlantic, bringing a dual tranche 10 year last Friday, totalling Eu3.25bn. Again, demand was overwhelming, with just under Eu8bn of orders coming in. The deal was priced flat to Merrill Lynch's curve at 28bp over mid-swaps and Euribor.
Issuers have also tapped into real money investors' appetite for higher yields. "A lot of investors have been referencing 4% as the number where they care and we are well above this level at the moment," a banker said.
Not to be left out, JP Morgan Chasecame back to the euro senior debt market for the first time for almost two years, after announcing record fourth quarter results.
Instead of going out straight away with a dual tranche deal, Morgan responded to a reverse enquiry and printed a Eu750m fixed seven year alongside a Eu2.5bn FRN in the same maturity. The order book of almost Eu6bn across the tranches was the largest the bank had ever amassed on a European issue.
Glitnir proves the point
If any more proof was needed of the depth of demand, Glitnir Bankiprovided it, with its first visit to the euro market for 18 months.
Since Fitch put out a negative report on Iceland in 2006, the country's whole banking sector had stayed away from the public euro market, instead preferring to bring private placements and dollar deals.
The unattractiveness of funding levels was clearly a factor. However, since the third quarter of 2006, Icelandic bank CDS have tightened to reach about 30bp, prompting issuers to return to the market.
"The interest on this deal was overwhelming," said an official at ABN Amro, which led the Eu500m three year fixed deal with Deutsche Bank. "Some investors have been burnt by Icelandic banks, but they are getting an incremental yield pick-up for a single-A rated credit. Investors have realised that Icelandic banks are quite comfortable when it comes to their liquidity position."
The book reached just over Eu900m, with pricing at the tighter end of expectations — 33bp over mid-swaps. This was 6bp-8bp back of CDS, an improvement even compared with Glitnir's dollar deal at the beginning of the year, which was 9bp-11bp outside CDS.
"We chose the fixed rate market because it is where price and execution is best at this point," the ABN official said. "This transaction appealed to credit buyers and only about a third of it was sold to bank buyers."
Hélène Durand