Banks are beating euro governments in credit markets by the most since July as European Central Bank loans stave off punitive borrowing costs for lenders such as BNP Paribas SA (BNP) and UniCredit SpA facing debt downgrades.
The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 European banks and insurers now costs 104 basis points less than the Markit iTraxx SovX Western Europe Index of swaps on 15 governments. That compares with a 28 basis-point gap at the end of November and a record 118 in July. Historically, it costs more to insure banks than governments.
The ECB’s 489 billion euros ($623 billion) of three-year loans are a lifeline for lenders competing with governments to borrow about $2 trillion this year as they seek to refinance maturing bonds and bills, according to data compiled by Bloomberg. While banks based in euro-area countries that still have top credit grades are able to issue unsecured bonds, lenders from nations whose ratings have been lowered, or face cuts, are frozen out.
“The ECB offered the banks a guaranteed source of liquidity,” said Nigel Sillis, who helps oversee about $53 billion as director of fixed income and currency research at Baring Asset Management Ltd. in London. “They’ve used it in big size and that’s taken the worst of the liquidity risk out of the market.”
The ECB plans to hold another three-year longer-term refinancing operation, or LTRO, at the end of February. That may total 1 trillion euros should the central bank loosen collateral requirements, according to Marchel Alexandrovich, an economist at Jefferies International Ltd. in London.
Bank bonds have rallied in the cash market since the LTRO announcement. The difference in relative yields between the EUR Corporates, Banking index and a gauge made up of Austrian, Finnish, French, German and Dutch government bonds is 371 basis points. The gap between the two indexes peaked at a 31-month high of 440 basis points on Nov. 30.
Elsewhere in credit markets, a gauge of U.S. corporate debt risk fell to the lowest in five months. Grupo Bimbo SAB (BIMBOA) sold $800 million in bonds. Cinven Ltd. will fund its purchase of patent business CPA Global with 430 million pounds ($663 million) of loans.
Credit Market Stress
The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, rose for a second day, adding 0.38 basis point to 35.19 basis points as of 5:08 p.m. in New York. The measure widens when investors seek the perceived safety of government debt and narrows when they buy assets such as corporate bonds and stocks.
The cost to protect U.S. company debt fell as the International Monetary Fund proposed a $500 billion expansion of its lending capacity, easing concern that Europe’s fiscal crisis may escalate.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 3.7 basis points to a mid-price of 109.5 basis points in New York, according to data provider CMA. That was the lowest level since August 15, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Default Swaps Fall
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined for a fifth day, decreasing 0.7 to 162.4, CMA prices show. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 3 basis points to 197.5 as of 8:35 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
The indexes 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 contract protecting $10 million of debt.
Bonds of Fairfield, Connecticut-based General Electric Co. (GE), were the most actively traded U.S. corporate securities by dealers yesterday, with 181 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s biggest maker of jet engines sold $4 billion of notes on Jan. 4.
Grupo Bimbo Bonds
Bimbo, the world’s largest bread maker, sold $800 million of 10-year notes to yield 270 basis points, or 2.70 percentage points more than similar maturity Treasuries, according to data compiled by Bloomberg. The Mexico City-based baker last issued debt in June 2010, when it sold $800 million of 4.875 percent of senior unsecured notes due in ten years, Bloomberg data show.
Yields on investment grade corporate bonds in the U.S. have fallen to 3.74 percent, compared to 4.41 percent the last time Grupo Bimbo issued a bond, according to Bank of America Merrill Lynch index data.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index rose for the 14th time in 15 sessions, gaining 0.1 cent to 92.27 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, reached the highest level since Aug. 5.
Cinven, the London-based buyout firm, hired HSBC Holdings Plc and JPMorgan Chase & Co. to underwrite and arrange its funding, which includes 310 million pounds of senior loans in pounds and euros, and 120 million pounds of mezzanine debt, said the two people with knowledge of the transaction.
CPA Buyout Loan
The owner of the Pizza Express restaurant chain said yesterday it agreed to buy CPA from Intermediate Capital Group Plc. (ICP) The senior debt includes a six-year term loan A paying interest at 500 basis points more than benchmark lending rates, and a seven-year term loan B with interest margin of 550 basis points, said the people, who declined to be identified because the information is private. A basis point is 0.01 percentage point.
Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
In emerging markets, relative yields narrowed for a third day, declining 5 basis points to 432 basis points or 4.32 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index.
Bank credit ratings are under pressure after S&P cut the sovereign grades of nine nations across Europe on Jan. 13, stripping France and Austria of their top AAA ratings, cutting Italy to BBB+ and reducing Portugal to BB, or two levels below investment grade.
Credit-default swaps on French government debt dropped 22 basis points to 202 basis points, according to CMA, since the ECB cash went to banks on Dec. 22. During the same period, swaps on BNP Paribas, the nation’s biggest lender, dropped more than 40 basis points to 242 basis points.
The French downgrade may affect the senior debt of banks such as BNP Paribas and Societe Generale SA as New York-based S&P reviews the sovereign’s ability to support its lenders, according to a Morgan Stanley note this week. In Italy, the change will probably push the most junior subordinated debt of UniCredit and Banca Intesa SpA (ISP), the country’s second-largest bank, down to a BB+ rating, the analysts wrote.
‘Not a Solution’
“There’s been a definite sense of relief in the market since the LTRO,” said Alberto Gallo, a credit strategist at Royal Bank of Scotland Group Plc in London. “It’s helped to buy time, but it’s not a solution because the banks still have wider problems.”
Among the issues that can’t be solved by the LTRO is capital. The European Banking Authority, which found a 115 billion-euro shortfall in its most recent stress tests, has given lenders until June to find cash or face nationalization.
“Capital raisings are obviously positive for the banks,” said Elisabeth Afseth, an analyst at Evolution Securities Ltd. in London.
Lenders have also been supported by the Federal Reserve pumping about $90 billion into the global financial system through its emergency swap lines since November, when interest rates on the loans were cut to promote borrowing.
That’s helped push European banks’ borrowing costs in dollars down to 78 basis points below the euro interbank offered rate, the lowest since Aug. 8. The spread between three month euro Libor and the overnight index swap, a measure of banks’ readiness to lend to each other, has declined to 84 basis points, the least since Oct. 31, from as much as 1 percentage point at the end of November.
Lowering Borrowing Costs
While the ECB and Fed intervention has reduced the risk of a bank defaulting, lenders and their sovereigns remain tightly intertwined. A web of crossed share- and bond-holdings links European banks to one another, increasing the risk problems at one lender will quickly infect others, while banks’ holdings of sovereign debt are “a multiple of equity,” according to Gallo.
Markit’s financial index of credit-default swaps has tumbled more than 100 basis points since the end of November to 248 basis points, while the sovereign benchmark has declined about 25 to 358. Both are down from record highs that month.
“There’s a limit to how much banks can decouple from sovereigns,” said Roger Francis, an analyst at Mizuho International Plc in London. “Banks will almost certainly follow sovereigns in downgrades. It’s a foregone conclusion.”
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net