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Capital Markets Weekly: ECB policy-easing drives strong financial and corporate sector supply

20 September 2019 Brian Lawson

European debt

European bond markets have reacted positively to the ECB's policy measures last week.

Most notably, there have been four Italian financial sector deals, including two subordinated successes, along with heavily-oversubscribed perpetual issues by two UK borrowers, and the first negative yield UK covered bond.

Italy

Early in the week, Unicredit gained almost EUR3 billion of orders for a EUR1.25 billion Tier 2 subordinated deal, the first Italian bank offering since Italy's new government was formed. The 10-year deal, callable after five years, was priced at a 2% coupon and issue price of 99.783%, 240 basis points over mid-swaps and 25 basis points inside initial guidance. Over 200 investors participated, with UK (36%), French (24%) and Italian (16%) buyers most prominent in the book, in which investment funds represented 82% of demand according to the bank's statement.

Banca Monte dei Paschi di Siena, previously a recent beneficiary of emergency state rescue and rated Caa1 by Moody's, followed with a EUR500 million five-year senior preferred issue. This gained EUR900 million of demand from around 100 investors: pricing was tightened from 3.875% to 3.625%. Asset managers and banks took 67% and 21% respectively: by geography, Italy, with 47% of the book, and the UK & Ireland with 33% dominated demand. Banca Intesa Sanpaolo also issued this week.

Insurer Generali also was in the market selling a EUR750 million 11-year bullet Tier 2 subordinated deal alongside a tender offer for EUR1 billion of three existing subordinated deals with first call dates in 2022. In its statement Generali flagged that the operation will "reduce interest costs in future years", "achieve a more balanced maturity profile" and strengthen its regulatory capital structure. The issue of is note for being the first green bond by a European insurer.

UK

Nationwide Building Society marketed a GBP AT1 deal, first callable in June 2025, at guidance of 6.375%. The deal attracted GBP3.75 billion of demand and was upsized from GBP500 million to GBP600 million to reflect the strong demand, with pricing tightened to 5.875% until the first call. According to Alexander Wall, Head of Financial Risk at the borrower "we were overwhelmed by the investor response and it quite clearly demonstrates that, for the right name and the right asset class, there's a huge amount of cash on the sidelines". The issue was undertaken to improve Nationwide's liquidity ratio, which had dipped from 4.9% to 4.5% after an AT1 deal was redeemed. The institution, the largest UK building society to have maintained mutual status, is noteworthy for an exceptionally high CET1 ratio of 31.4% of risk-weighted assets and its conservative business policies.

It was followed by Barclays, which sold a GBP1 billion Additional Tier 1 deal with initial price guidance of 6.875% to initial call, which gained demand exceeding GBP7.5 billion.

On the same day, Skipton Building Society sold the first UK covered bond with negative yield.

Lastly, troubled UK lender Metro Bank has prepared a Medium Note Program and has appointed banks to arrange a senior non-preferred MREL-eligible bond thereunder. According to Global Capital this will have a four-year maturity.

Lastly, GlaxoSmithKline issued two tranches of negative-yielding debt in a three-part EUR2.5 billion package spanning two and four years. Each were sized at EUR500 million, with zero coupons and premium issue prices, alongside a two-year EUR1.5 billion floating rate note.

Other

MetLife has become the first financial institution to sell Euro-denominated senior debt at a sub-zero yield, with a short-dated EUR500 million offering. Its 2022 offering has a 0% coupon and issue price of 100.063%. The sale followed several banks extending the term of their sales in recent weeks to avoid setting a negative yield.

Spain's CaixaBank issued a EUR1 billion five-year sustainable issue, which complies with UN Sustainable Development Objectives, the first such issue by a Spanish bank. The proceeds will be used to focus on SME lending and job creation in the country's weakest economic regions in terms of GDP per capita and unemployment and will include provision of micro-credits for low income households. The issue gained EUR2.25 billion of demand and was priced at 113 basis points over mid-swaps with a 0.625% coupon.

Greece's OTE - which is a subsidiary of Deutsche Telekom - sold EUR500 million of seven-year debt. It gained demand of EUR2.25 billion. The deal was priced at 0.875%, the lowest coupon to date for the company: its parent subscribed EUR100 million.

Also, in Greece, Hellenic Petroleum is planning a five-year deal for at least EUR300 million to repay existing debt: it is still awaiting official clearance. Terna Energy is also expected to launch a financing this year according to local media.

European markets also were receptive to high-grade corporate supply Within this, on 16 September, BMW, Abertis and AbbVie all launched two-tranche packages, for EUR2 billion, EUR1.5 billion and EUR1.4 billion respectively. European energy company Wintershall Dea raised EUR4 billion in a four-tranche offering with maturities ranging from 2023 to 2031.

Our take

This week's strong European debt calendar is unsurprising given the ECB's policy easing moves last week, which included a cut in policy rates and the restarting of bond purchases. The ECB will undertake bond purchases at a monthly rate of EUR20 billion for "as long as necessary". This amount was less than expected and compares with the EUR60 billion purchase level applied when the Asset Purchase Programme was first introduced, but the overall policy tone was clearly towards softening.

The rush of Italian supply follows the ratification of Italy's new government last week but also showed market calm over the split in Italy's center-left Partito Democratico into two groups. Overall, Italian bonds have been relatively stable: having started the month at 0.97%, and traded as low as 0.81%, the country's 10-year bond yield now stands at 0.88% (London close, 18 Sept).

Overall, this week's supply is a positive indicator for UK risks, with both corporate and asset backed negative yield issuance, along with two very-strongly received AT1 deals for two quite distinct UK financial-sector risks.

It also points to a continuing message of investors seeking yield - in countries with higher perceived risks and for riskier instruments, and the relentless drive for further negative yield issuance. Both these trends were already well-established but have been reinforced by the ECB's easing stance.

Posted 20 September 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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