Peripheral Bank Bond Penalty Vanishing as Confidence Returns

The penalty that banks in Europe’s most indebted nations pay to borrow compared with those from the richest economies fell to the lowest in four years amid growing confidence in the region’s economic recovery.

Lenders from Italy to Greece now pay 0.38 percentage points more yield than borrowers from core nations including France and Germany, down from a high of 4.38 percent reached in November 2011, according to Bank of America Merrill Lynch index data. The average yield on bonds issued by peripheral banks fell 56 basis points this quarter to a record 2.17 percent, the data show.

Bonds shunned by investors during Europe’s debt crisis returned to favor amid optimism Italy is emerging from recession and after Spain was upgraded by Moody’s Investors Service. A selloff in emerging market assets and the crisis in Ukraine failed to damp demand for peripheral debt, which was buoyed by European Central Bank President Mario Draghi’s pledge to keep interest rates low well into the economic recovery.

“Peripheral banks were paying substantial yields but they have been decreasing over the last months as investor sentiment has improved, with the recent upgrade of Spain a significant catalyst,” said Cristina Martinez, who helps oversee about 6 billion euros in fixed income at Ibercaja Gestion SGIIC SA in Zaragoza, Spain. “Also, the periphery is isolated from much of the trouble in eastern Europe while some core banks are not.”

Peripheral bank bonds are among the best performing corporate securities in Europe, returning 3.24 percent this quarter, according to Bank of America Merrill Lynch index data. That compares with 2.11 percent for notes issued by lenders in the region’s core and 2.25 for all financial debt in euros.

Intesa Sanpaolo SpA, Italy’s second-biggest bank, handed investors the best returns among financial investment-grade notes in euros, with the Milan-based lender’s 6.625 percent bonds due September 2023 returning 8.58 percent, according to Bloomberg bond index data.

AT1 Sale

In European credit markets today, Societe Generale SA is selling 1 billion euros ($1.4 billion) of additional Tier 1 bonds after postponing a sale of the riskiest bank debt, a person familiar with the matter said. France’s second-largest lender is issuing undated securities to yield 6.75 percent that it can buy back in April 2021, according to the person, who asked not to be identified because they’re not authorized to speak about it.

Paris-based Societe Generale began marketing the bonds on March 24 before pulling the sale two days later citing the imminent publication of a ratings report. Fitch Ratings said March 26 it revised the lender’s outlook to negative from stable because the “probability of support from the state” is likely to decline in the next one to two years.

European lenders sold $15.1 billion of additional Tier 1 notes this month, almost half the total issued since the market opened a year ago, as they move to comply with new regulations that aim to pass bailout costs to investors instead of taxpayers. Societe Generale’s euro notes will be written down or convert into equity if its common equity Tier 1 capital ratio falls below 5.125 percent, according to the person.

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