Sales of structured notes tied to the creditworthiness of banks in the euro region’s periphery are the highest in six months as investors gain confidence lenders will benefit from the region’s improving economy.
JPMorgan Chase & Co. (JPM) and Nomura Holdings Inc. (8604) led issuance of $42.3 million of the securities in September, the most since $167.2 million in March, according to data compiled by Bloomberg. The notes are tied to the debt of lenders including Spain’s Banco Popular Espanol SA (POP), Banco BPI SA of Portugal and UniCredit SpA.
The euro area’s economy emerged from its longest-ever recession in the second quarter and European Central Bank President Mario Draghi said this week he’s ready to use another longer-term refinancing operation if needed to curb market rates. Bank credit risk is improving, with investors demanding 102 basis points of extra yield to hold their debt instead of government bonds, down from 179 a year earlier, according to Bloomberg bond index data.
“Peripheral banks have been beaten up over the past few years, but there is growing investor comfort with them and more willingness to take on that exposure, especially in Spain where the restructuring of balance sheets has been extensive and visible,” said Steve Hussey, head of financial institutions credit research at AllianceBernstein Ltd. in London.
Spanish banks took more than 200 billion euros ($270.6 billion) of impairments between June 2008 and December 2012 amid the collapse of a decade-long property boom that sent home prices plunging and burdened banks with more bad loans, according to Banco Bilbao Vizcaya Argentaria SA. The country’s lenders, which have received 129 billion euros of capital injections since the end of 2007, are in a strong position to pass an ECB asset quality review next year, BBVA’s chief financial officer Manuel Gonzalez Cid, said Sept. 25.
JPMorgan issued the first credit-linked notes tied to Portugal’s Banco BPI since at least 1999, Bloomberg data show. The largest U.S. bank by assets raised $19.8 million from two offerings that pay 4.7 percentage points and 4.8 percentage points more than the three-month euro interbank offered rate.
Nomura sold $5.5 million of 15-year callable notes tied to UniCredit, Italy’s largest bank, with coupons of 9.1 percent this month, as well as 2.28 million euros of 5.26 percent securities linked to Banco Popolare SC. Italian banks’ gross non-performing loans as a proportion of total lending rose to 7.2 percent in July from 5.7 percent a year earlier, according to the Italian Banking Association ABI.
Craig MacDonald, a spokesman for JPMorgan in London, declined to comment on the notes, while Nomura spokesman Rob Davies was unable to comment immediately.
“Interest in peripheral banks is emblematic of the risk-on environment, with investors looking to take advantage of wider credit spreads on offer in countries like Spain and Italy” said Michael Symonds, a credit analyst at Daiwa Capital Markets in London.
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