European banks become darlings of US bond market


By Danielle Robinson

NEW YORK, Oct 18 (IFR) - European banks, once shunned byconservative fixed-income investors, have suddenly become one ofthe hottest items in the US bond market, and especially theirriskier subordinated debt, as France's BPCE discovered thisweek.

BPCE was swamped by more than US$6.5 billion of demand for aUS$1.5 billion 5.7% offering of subordinated Tier 2 capital,enabling it to price at least 10bp cheaper than what it wouldhave paid if the deal had been done at home in euros.

It had been waiting to see what impact the US governmentshutdown would have on Yankee bond spreads before jumping intothe US market.

What it witnessed was huge spread-tightening in the pastfortnight, as the shutdown unwittingly left investors thinkingthe Federal Reserve's tapering was more of a 2014 than a 2013affair.

"We've seen a strong rally in higher beta debt andespecially European subordinated bank debt," said David Knutson,senior FIG strategist at Legal & General Investment Managementin the US.

"People are more desperate for returns now that taperingappears to have been pushed further out, and besides that,Europe seems much healthier."


Most US subordinated debt secondary levels were 10bp-15bptighter on the week, and in Morgan Stanley's case, 17bp better.

But the rally in European dollar subordinated debt wasdouble that.

ING's recent US$2 billion 10-year subordinatedoffering has ratcheted in more than 40bp since pricing at 300bpover Treasuries on September 16, and more than 22bp to 258bp onFriday, from 280bp just before BPCE priced its deal on Tuesday.

Much to the delight of underwriters in the US, the rally hastipped the scales in favor of the US bond market versus euros,at least when it comes to European banks issuing subordinateddebt.

"The US dollar market for subordinated debt is far and awaybetter for European banks than the euro market," said a FIG debtcapital markets banker at a US bank.

BPCE saved about 10bp by coming to the US dollar marketrather than in euros, said sources close to the issuer.

Some FIG bankers said Rabobank and Royal Bank of Scotland could pick up at least 50bp by issuing subordinated debtin dollars rather than euros.

"Although the basis swap isn't as attractive in the seniorunsecured dollar market any more, it continues to be veryattractive in subordinated," the coverage banker said.


One London-based FIG banker said the benefits of financingin dollars versus euros for Tier 2 capital very much depended onthe quality of the issuer.

Blue-chip European names like HSBC and Norway's DNB would probably achieve lower financing costs in euros,the London banker said, where they could also sell Tier 2 debtin the more efficient 10-year non-call five-year structure.

BPCE, led by active bookrunners Citigroup, Deutsche Bank,Goldman Sachs, JP Morgan and Natixis, chose a similar executiongame plan as ING in September, by starting out with initialprice thoughts in the low to mid 300bp range - 337.5bp in BPCE'scase.

That was quickly refined to initial price guidance ofTreasuries plus 312.5bp (+/-12.5bp) as books swelled to almostUS$7 billion. It finally launched at 300bp, a spread thatoffered a 20bp pick-up to the 280bp level the ING deal wastrading at the time.

By the time Friday rolled around, investors' thirst for thebonds had pushed BPCE's subordinated debt spread down to 280bpin the secondary market.

Pricing was built by looking at Credit Agricole and Societe Generale's five-year senior unsecuredYankee bond issues from late September, which have alsotightened in from respective Treasuries plus 130bp and 125bplaunch spreads to around 115bp-120bp on Friday.

That gave BPCE a pricing reference of an implied newfive-year senior issue at around the 135bp area. From there,50bp was added for the credit curve difference between five and10-year senior French bonds, to bring a new 10-year senioroffering by BPCE to around Treasuries plus 185bp.

The leads then added 150bp of senior/subordinated premium,which brought them to BPCE 10-year Tier 2 initial price thoughtsof around 337.5bp.

By the time it priced at 300bp, BPCE's impliedsenior/subordinated premium had been tightened in to112.5bp-115bp, in line with the 110bp senior/sub premium forING.

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