Intesa Leads Peripheral Bank Bond Sales as Yields Drop to Record

Intesa Sanpaolo SpA (ISP) led the busiest week for financial company bond sales from Europe’s periphery in a month as yields on the securities fell to a record.

Italy’s second-biggest bank joined Portugal’s Banco Espirito Santo SA in raising 3.85 billion euros ($5.2 billion) in debt, the most since the week ending October 25, according to data compiled by Bloomberg. The average yield on peripheral financial corporate bonds dropped to a record 2.73 percent on Nov. 18 from an all-time high of 10 percent reached two years ago this month, Bank of America Merrill Lynch index data show.

Investor confidence is returning to the periphery as Ireland prepares to exit its bailout program and after Spain emerged from a two-year recession in the third quarter. Lenders in Europe’s neediest nations are also strengthening their balance sheets before the European Central Bank begins stress tests this month to determine whether they’re strong enough to withstand renewed turmoil.

“Peripheral banks’ fundamentals are generally improving, in terms of leverage and loan-to-deposit ratios,” said Andrew Sheets, head of European credit strategy at Morgan Stanley in London. “That’s probably going to continue into next year. Also, if you look at government bond spreads there’s better sentiment toward the periphery and issuers are taking advantage of that.”

The yield on Italy’s 10-year government bonds fell to 4.1 percent from a year-to-date high of 4.9 percent at the end of February. The extra yield investors demand to hold Portuguese government bonds instead of German bunds fell to 4.19 percent from a peak of almost 16 percent in January 2012, according to data compiled by Bloomberg.

Yield Hunt

The cost of insuring subordinated debt of European lenders fell to the lowest in 3 1/2 years. The Markit iTraxx Europe Subordinated Financial index of credit-default swaps, including contracts on Intesa and UniCredit SpA, fell 4.9 basis points to 148 basis points at 11:48 a.m. in London.

“People are thinking that it’s OK just to reach for yield for the next few months,” said Paul Smillie, a Singapore-based banking analyst at Threadneedle Asset Management, which oversees about $126 billion. “There’s probably a three-month window open to buy riskier stuff and issuers are taking advantage of that mentality.”

In the new issue market today, Amsterdam-based oil trader Trafigura Beheer BV is selling 300 million euros to 500 million euros of five-year bonds to yield 5.25 percent, according to a person familiar with the matter.

Royal London Group, the U.K.’s biggest customer-owned life insurer, is marketing 400 million pounds ($648 million) of 30-year subordinated bonds, according to another person. The notes, which can be bought back by the company after 10 years, will yield 6.125 percent.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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