January 6, 2017 / 4:05 PM / 7 months ago

Southern European sub debt returns

5 Min Read

* Intesa, Santander reopen market after seven-month hiatus

* Bank of Cyprus Tier 2 mandate cements risk-on sentiment

By Alice Gledhill

LONDON, Jan 6 (IFR) - Intesa Sanpaolo and Santander seized on thriving issuance conditions to sell Southern Europe's first broadly syndicated subordinated bonds since May 2016, signalling a change in fortunes for the region's lenders.

The banks reopened the euro Additional Tier 1 and Tier 2 markets respectively, a turnaround after benchmark supply evaporated in the second half of last year as challenging conditions and unappealing pricing kept mandates on the shelf.

The sea-change in conditions has been such that even Bank of Cyprus is considering selling a euro Tier 2 that would be its first public debt sale since bailing in investors in 2013. Such a deal would be an encouraging sign for the region's smaller, lower rated lenders.

Bullish sentiment at the start of 2017 provided the catalyst to unblocking the pipeline and will help the banks build buffers of loss-absorbing debt to meet new regulatory requirements.

"Credit spreads towards the end of December tightened nicely," said one syndicate official. "Levels become very palatable very quickly  A lot were priced out, but suddenly Italian and Spanish credits are looking a lot more likely to have access to the market."

A Santander 1.5bn 3.25% Tier 2 due 2026, for example, tightened by 45bp last month to about 240bp over mid-swaps, while clarity around Banca Monte dei Paschi di Siena, which urgently needs to raise capital, also provided a boost.

Intesa Sanpaolo proved virtually immune to the troubles in Italian banking. It priced the first public Italian AT1 benchmark since January 2016, a 1.25bn 7.75% perpetual non-call 10-year (Ba3 /B+/BB-/BB) issue, on 4.5bn of demand despite a minimal premium.

"BMPS has got through about 75% of the saga, which is a positive result, and everyone thinks the UniCredit rights issue is going to work," said Matthew Rees, a portfolio manager at Legal & General Investment Management.

"The tail risk has been massively reduced for Italian banks."

Strict Door Policy

Renewed market access will come as a relief for banks under pressure to shore up their balance sheets, and needing to comply with new global and European rules demanding higher stacks of loss-absorbing debt.

Like other European jurisdictions, Spain and Italy are expected to introduce a new form of senior debt to help build those buffers, but the requisite legislation is unlikely to be passed before the second half of this year.

Lenders are expected to prioritise Tier 2 issuance in the meantime, with CaixaBank a prime candidate after a deal was rumoured late last year.

"The market would salivate," said the first banker. "It's a good name, but pays a bit more spread."

However, spreads may still be too high to swallow for smaller lenders. Banco de Credito Social Cooperativo and Banco Mare Nostrum were forced to pay 9% coupons for sub-benchmark Tier 2 trades in recent months, and others may prefer to see levels retrace further before trying their luck.

The AT1 market looks even more challenging, particularly where lean capital buffers could see regulators force lenders to suspend coupons.

"I don't know if the market is there," said Andres Calzado Catala, head of Iberia FIG DCM at Nomura. " banks will do Tier 2 first, and then could look into AT1."

Litmus Test

Bank of Cyprus (Caa2/B-) will provide a gauge of investor sentiment towards Southern Europe's lower rated lenders as it tries to bring a 10-year non-call five-year after a London roadshow early next week.

Despite its chequered past, leads reckon there is now appetite for the credit, which must issue debt to comply with European rules known as Minimum Requirement for Own Funds and Eligible Liabilities.

"The question is, when is the market willing and able to take them?" said one banker close to the deal. "At the back end of last year there was clearly volatility, but you can get things done in Q1 that you can't in Q4, especially for more niche names."

Bondholders suffered heavy losses during the Cypriot banking crisis, but the lender this week repaid in full its 11.4bn Emergency Liquidity Assistance in what it described as a "significant milestone" in its journey back to strength.

"It's certainly interesting," said Legal & General's Rees.

"It will be very high yielding and could definitely attract some faster money. If they are starting to get on the mend, it could be one of those restructuring stories that makes sense."

Reporting by Alice Gledhill, editing by Helene Durand, Matthew Davies

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