Banks on Europe's Edge Face $122 Billion Refinancing Bill
Banks on Europe’s Edge Face $122 Billion Bill
Denis Doyle/Bloomberg
Alfredo Saenz, chief executive officer of Banco Santander SA, listens during a news conference at the company's headquarters in Madrid.
Alfredo Saenz, chief executive officer of Banco Santander SA, listens during a news conference at the company's headquarters in Madrid. Photographer: Denis Doyle/Bloomberg
Aug. 2 (Bloomberg) -- Georg Grodzki, global head of credit research at Legal & General Investment Management, speaks about European banks' financing costs. Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits. He talks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
Banks in Europe’s most indebted nations need to refinance $122 billion of bonds this year, likely paying high interest costs even after receiving a clean bill of health from regulators.
Italy’s Intesa Sanpaolo SpA has the most debt coming due at $28 billion, followed by UniCredit SpA with $21 billion, according to data compiled by Bloomberg. Italian banks must refinance a total $69 billion of bonds this year and $157 billion in 2011, while Spanish lenders have $28 billion and $73 billion of debt that needs to be paid.
Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits. Banco Santander SA, the countries’ third- biggest debtor, and Banco Bilbao Vizcaya Argentaria SA took advantage of a thaw following the European Union’s stress tests to sell bonds last week, though at relative yields that were as much as double what they paid before the crisis.
“There is still a strong cloud of pessimism hanging over the markets,” said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London. “Getting that funding done will be as good a test as the stress tests were.”
Banco Santander, Spain’s largest bank, which has 14.2 billion euros ($18.5 billion) of bonds maturing this year and 25.8 billion euros in 2011, paid a margin 50 percent higher on July 29 than when it sold debt in February, Bloomberg data show. BBVA, with 5.1 billion euros of notes due by year-end, paid double. Alberte Patino, a spokesman for BBVA in Madrid, declined to comment.
Debt Maturities
The 24 lenders in the benchmark Stoxx 600 Banks Index that are from Portugal, Italy, Ireland, Greece and Spain have $271 billion of debt to refinance next year and $230 billion in 2012, Bloomberg data show.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt narrowed for a fourth straight week and by the most since December.
Global corporate bond spreads fell 6 basis points last week to 177 basis points, or 1.77 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. The gap has declined 19 basis points since the end of June and is up 1 basis point from Dec. 31. Yields fell to 3.72 percent, from 3.96 percent on June 30.
IBM Offering
International Business Machines Corp., the world’s biggest computer-services company, may sell three-year notes in a benchmark offering, according to a person familiar with the transaction. The Armonk, New York-based company may issue the debt as soon as today, said the person, who declined to be identified because terms aren’t set. Benchmark offerings are typically at least $500 million.
The cost of protecting company debt in the U.S. and Europe fell to the lowest in more than 11 weeks.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, declining 3.76 basis points to a mid-price of 100.63 basis points as of 11:27 a.m. in New York, according to Markit Group Ltd. That’s the biggest decline since July 13. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings dropped 4.58 to 100.43.
Both indexes, which are at the lowest since May 13, typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of bonds and loans.
Bank of Ireland
Bank of Ireland Plc and Allied Irish Banks Plc, the country’s two biggest lenders, have 16.7 billion euros of debt maturing this year, according to data compiled by Bloomberg. No Irish lender has issued a benchmark bond since April.
Portuguese banks have 1.4 billion euros of bonds coming due this year and 8.6 billion euros in 2011, while Greek lenders have 1.1 billion euros and 11.4 billion euros.
The results of the EU’s stress tests on banks’ financial health on July 23 helped ease investor concern that lenders would suffer losses on sovereign debt holdings. Just 7 of 91 lenders failed, and sentiment was further buoyed three days later when the Basel Committee on Banking Supervision proposed softer capital rules for financial companies worldwide.
Investor Sentiment
“Sentiment is much more positive, even toward some of the more difficult names like the Irish or Spanish banks,” said Edward Stevenson, the London-based head of European financial debt at BNP Paribas SA, France’s biggest bank by assets.
Bank of America Corp., the biggest U.S. lender, Switzerland’s second-largest bank Credit Suisse Group AG and No. 1 Dutch lender Rabobank Nederland NV used the investor optimism to raise money in Europe’s bond market last week. Banks sold 8.8 billion euros of notes, making it the busiest week since lenders issued 19.6 billion euros of debt in the five days starting July 4, Bloomberg data show.
Banco Santander issued 1.5 billion euros of notes due August 2014 in its first public offering of fixed-rate, senior unsecured debt since Feb. 24. It paid interest of 160 basis points more than the benchmark swap rate, compared with the 105 basis-point margin on its earlier 1 billion-euro March 2015 deal, according to Bloomberg data.
‘Locomotive Effect’
The lender’s deal was helped by “a little bit of the locomotive effect,” where issues by other banks helped stoke investor appetite, Chief Executive Officer Alfredo Saenz said at a press conference in Madrid on the day of the sale. Santander, Spain-based Banco Santander has enough money from debt issues and deposits to repay its maturities through 2012, according to spokesman Peter Grieff.
BBVA sold 1.25 billion euros of bonds due August 2015 on July 28 that were priced to yield 170 basis points over swaps, double the spread when it last issued five-year debt. The bank paid a margin of 85 basis points when it issued 1 billion euros of April 2015 notes on April 12, Bloomberg data show.
“It’s good for the sector that BBVA got done but it’s too early to say” if weaker banks will be able to raise money before the summer lull, said Anke Richter, a credit research analyst at Conduit Capital Markets Ltd. in London. “Second-tier banks will probably have to wait until September.”
Stress Tests
Smaller lenders may also be hampered by concern the stress tests weren’t rigorous enough because they didn’t take account of all government bonds held by banks.
“Rather than the stress tests being a game-changer, one is left with the nagging feeling that this was another opportunity missed,” Andrew Balls, head of European portfolio management at Pacific Investment Management Co., wrote in a July 28 report. European lenders’ “underlying problems are fundamental and long-term in nature,” wrote Balls, whose Newport Beach, California-based firm runs the world’s biggest bond fund.
Major lenders from Europe’s peripheral nations have sold $22.4 billion of bonds with lifetimes of 18 months or longer since May, the smallest amount in any three-month period since the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, according to Bloomberg data.
For all the improvement in sentiment last week, bonds sold by European banks still lagged their U.S. counterparts in July. European financial-company debt handed investors a 1.48 percent return, compared with 2.37 percent in the U.S., according to Bank of America Merrill Lynch index data. Global government debt returned 0.59 percent, down from 0.83 percent in June.
‘Lingering Sovereign Risk’
“We’re very wary of lingering sovereign risk and are buying debt of banks which aren’t going to be affected by a negative change in sentiment,” said Sanjay Joshi, who oversees about $500 million as a money manager at London & Capital Group Ltd. in London. He said he passed on the Banco Santander and BBVA issues.
The extra yield investors demand to own European financial- company bonds has climbed 48 basis points to 217 basis points from a 29-month low on April 16, according to Bank of America Merrill Lynch’s EMU Financial Corporate Index.
Spanish bank spreads average 333 basis points, 62 percent wider than at the beginning of April. Portuguese lenders’ margins average 495 basis points, 85 percent wider, while Irish financial debt pays a 585 basis-point margin, 35 percent more. Italian bank spreads are 218 basis points, an increase of 34 percent compared with four months ago.
With many frozen out of the bond market, banks in the peripheral countries are relying on the European Central Bank for the bulk of their funding. Spanish lenders, which account for 10.5 percent of assets in the EU financial system, borrowed a record 126.3 billion euros from the Frankfurt-based ECB in June, the most recent Bank of Spain data show.
The cash, lent at cheap rates, is “the ultimate methadone,” and is prompting banks to “delay their refinancings because they can always get money from the ECB,” said Stuart Thomson, who helps manage the equivalent of about $1 billion at Ignis Management in Glasgow.
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Kate Haywood in London at khaywood@bloomberg.net
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