* Lenders increase issuance in euros and sterling
* Favourable basis swap lures issuers to Europe
* Issuance in dollars drops as market becomes less competitive
By John Weavers
Nov 14 (IFR) - Australia's major banks are following in the footsteps of corporate Australia and are heading to Europe for funding.
The key driver has been a favourable move in cross-currency basis swaps that has made Europe as attractive a destination for issuing bonds as the traditionally dominant US dollar market.
Five-year euro/US dollar basis swap rates have contracted 50bp since June 2012, from 65bp to 15bp, amid growing investor confidence in the eurozone economy and a dearth of euro supply.
The move in swap rates includes a near 15bp tightening since early September 2013 as October's US government shutdown loomed. The Australian dollar/US dollar swap meanwhile has remained largely unchanged at about 25bp throughout 2013.
A lower basis swap shaves valuable percentage points off the final cost of funding for companies that borrow in euros and swap the proceeds into Australian dollars.
Australian banks go abroad for funding because the domestic bond market is not deep enough to meet all of their wholesale funding needs. A more diverse investor base also offers protection in the event issuers are frozen out of markets as the Aussie majors were during the global financial crisis before the Commonwealth Government stepped in and provided guarantees.
The banks were heavy issuers in Europe last year, but mainly in the continent's deep covered bond market. The latest run of offerings, however, shows that Europe's senior unsecured market has become an increasingly viable option.
A spate of euro and sterling deals this fall has added up to one quarter of all senior unsecured funding for Australia's major banks this year. Only 10% of senior unsecured funding for the banks was in euros and sterling in 2012.
The euro's share has climbed to 16% from 5% while 10% has been raised in sterling this year versus 4% in 2012.
"There is pent-up Euro demand for Australian major senior bank paper given the comparable lack of issuance in recent years," said Paul White, global head of syndicate at ANZ.
Also, the euro/bills basis has contracted "substantially from the relatively high historical levels seen in 2012, making funding levels more attractive," White said.
In contrast, the four biggest Australian banks have cut their reliance on the US dollar market from 40% of senior unsecured funding in 2012 to 35% this year. Samurai issuance has dropped from 10% last year to nothing this year until Commonwealth Bank of Australia offered a JPY100bn (U$1.01bn) Samurai bond with fixed and floating three-year tranches on November 8.
National Australia Bank, rated Aa2/AA-/AA- (Moody's/S&P/Fitch), started the ball rolling on the latest spree of European borrowings on November 5, when it raised £425m (US$681.7m) from its first senior unsecured sterling issue of the year. The new three-year floating-rate note priced at three-month Libor plus 48bp.
NAB swapped the notes back to a spread in the high 60s over local bank bills (BBSW). This is only about 10bp wide of where a new Aussie major three-year floater would price in the domestic market, which has the advantage of an elevated bid from local bank balance sheets.
The following day, NAB issued a 1bn (US$1.35bn) 2.0% seven-year bond at mid swaps plus 58bp, believed to be the thinnest spread for a seven-year euro-denominated bond for any bank since 2008.
The seven-year euro print also allowed NAB to diversify its maturity schedules. Tenors of three to five years dominate the Australian market, and it is unusual to see anything printed between five and 10 years in US dollars.
NAB and ANZ recently priced Aussie dollar five-year offerings at 88bp over bank bills, suggesting that a new seven-year bond would probably price at about 110bp over BBSW, according to Sydney syndication desks.
The new NAB euro seven-year bond was swapped back to about 125bp over BBSW, 15bp or so wide of a theoretical Aussie dollar seven-year note, but about 10bp inside the interpolated US dollar curve.
On the same day, Westpac Banking Corp became the last of Australia's four major banks to issue a three-year euro floater this year with a 800m transaction.
The November 10 2016 offering was priced to yield 33bp over three-month Euribor, which was flat or 1bp inside the 1bn ANZ October 2016s and the 850bn CBA October 2016s.
Swapping back to Australian dollars would have resulted in a spread of about 65bp over BBSW, which is just 6bp to 8bp more than where a major bank can expect to issue a local currency three-year floater. It also priced flat to just back of the banks' current outstanding US dollar curve, according to the lead managers.
Such competitive pricings suggest that Europe will become an increasingly frequent destination for Australia's highly regarded major banks