After a summer shutdown the market for European senior unsecured bank debt looks lively once again. At first glance, that’s great news for the euro zone’s banks. They need to refinance €800 billion ($1.1 trillion) of debt next year, according to Simon Samuels, a London-based banking analyst at Barclays Capital, and they’ll lean heavily on the senior unsecured market for their long-term health.
But the recovery has been limited to a few top-rated banks, and even some of them are uneasy. No one expects the window for issuance to stay open much longer while sovereign debt fears persist.
| Slideshow: Top Ten European Unsecured Bank Debt Issues |
Deutsche Bank kicked things off on September 29 with a two-year, €1.5 billion floating-rate note, the first European unsecured bank issue in more than two months. Dutch banks ABN Amro and Rabobank soon followed, as did Germany’s Commerzbank and several non-euro-zone players, including the U.K.’s Standard Chartered and Svenska Handelsbanken of Sweden.
This resurgence coincided with optimism that the European Union would hatch a real plan to fix its sovereign debt mess. (EU leaders agreed on the broad outlines of a plan late last month.) Then again, the market had all but hit bottom. The third quarter of 2011 was the weakest for European senior unsecured bank debt since 1998, according to Dealogic, with a mere $39 billion worth of bonds issued, compared with $158 billion during the same period in 2010.
Michael Gower, the Utrecht, Netherlands–based head of long-term funding at triple-A-rated Rabobank, says his bank doesn’t foresee any fundraising woes for the time being. “But conditions are extremely tough. We’re back to where we were in early 2009,” Gower admits, noting that Rabobank paid a premium of about 20 basis points over its normal cost of funds for its October 10 issue. The €1.5 billion, seven-year fixed-rate note was priced at 3.62 percent, 125 basis points over midswaps.
Rabobank was satisfied with its €2 billion order, but that sum could have reached €2.5 billion in better circumstances, Gower says. “Market sentiment is very nervous,” he warns.
The prices of credit default swaps, a form of insurance against debt defaults, reflect such fears. The Markit ITraxx Financial Index of CDSs linked to the senior debt of 25 European lenders and insurers rose to a record 314 basis points on September 12. But by October 17, when Commerzbank and the U.K.’s HSBC Holdings issued a total of €2.1 billion in bonds, it had retreated to 245.
Despite the recent flurry of issues, the total of $12.8 billion raised for the fourth quarter as of October 25 won’t help much. European banks raised more than $325 billion in senior unsecured debt during the first half of 2011, enough to see most of them through at least the first quarter of next year. But policymakers expect big trouble after that given the vast debt that needs refinancing.
Unless investor appetite for bank paper truly recovers, central bank lending might have to pick up the slack, says David Lyon, managing director in the financial institutions group at the London office of Barclays Capital. The bank was lead manager on ABN Amro’s €500 million issue of September 30. “Covered bonds are not a panacea,” Lyon adds. Issuance of covered bonds, a popular bank funding vehicle that is secured by high-quality loans, has also faded in recent months amid concerns about bank debt.
Investors aren’t clamoring for more bank debt either. In July, London-based asset manager Kames Capital cut its exposure to bank debt from 28 percent to 14 percent of its £240 million ($385 million) investment-grade bond fund. “European policymakers need to come up with a sustainable solution,” says fund co-manager Euan McNeil.
Oliver Judd, credit analyst at London’s Aviva Investors, which manages about $256 billion in fixed-income investments, says the reopening of the market is limited to banks that are too big to fail; in any case, he says, sentiment is already turning.
Another pullback could have nasty fallout for banks on the vulnerable periphery of the euro zone, where investors fear to tread. Spain’s Banco Santander faces some €49 billion of maturing debt between now and 2013, while Italy’s Intesa Sanpaolo is staring down more than €45 billion. Solving their problems through the senior debt markets looks next to impossible. • •
