Wait for ECB Stimulus Leaves Bond Sales in the DoldrumsJohn Glover
Bond issuance by banks in Europe slumped last month, making it the slowest July since 2001 as lenders waited for the next round of stimulus efforts by the European Central Bank.
Banks issued 21.7 billion euros ($29 billion) of notes in pounds and the single currency, according to data compiled by Bloomberg. The slowest month of the year for sales came after lenders priced 300 billion euros of debt securities since the start of the year, the busiest half since the same period of 2011, the data show.
While financial markets in Europe typically slow in July and August as bankers and investors head for the beach, other elements are contributing to this year’s seasonal respite. Chief among them is ECB President Mario Draghi’s June 5 promise to make cheap loans available to the region’s lenders through a so-called long-term refinancing operation, said Roel Jansen at ING Investment Management.
“Banks are taking an economic decision in favor of going to the ECB rather than using capital markets,” said Jansen, who is responsible for about $8.7 billion as head of European investment-grade credit in The Hague. “There’s also a process of deleveraging going on, so they have less need for funding.”
The Frankfurt-based ECB is reviewing banks’ assets and the way they value them prior to taking over supervision, to ensure that holdings are valued in the same way across jurisdictions. The European Banking Authority in London is running stress tests alongside the asset quality review and the results are due to be published in October.
“Managements have been minded to be defensive given that the AQR is coming up,” said Paul Smillie, a Singapore-based credit analyst at Threadneedle Asset Management Ltd., which oversees about $126 billion. “They’re defensive, deleveraging, defending their balance sheets and shrinking loans-to-deposits ratios. Negative net supply in senior bonds will continue.”
Copenhagen-based Danske Bank A/S replaced the equivalent of 7.1 billion euros of bonds it redeemed in the first half by issuing 3.76 billion euros of new debt, according to a company presentation.
“My guess is that the impending AQR and stress test might create a hiatus,” said Simon Adamson, an analyst at CreditSights Inc. in London. “Issuance will maybe pick up again from November.”
As well as shrinking their balance sheets, lenders are raising debt capital as they prepare for the ECB to take over as supervisor from November. In the first half, European banks raised almost $40 billion either by exchanging old-style junior bonds for securities compliant with the latest rules, or by new issuance of the debt, known as additional Tier 1.
Because of the risks attached to this kind of debt, which is designed to take losses to help the lender remain a going concern, issuers so far have typically been large banks such as Deutsche Bank AG, Barclays Plc and Banco Santander SA that investors judge to be too big to fail.
“The big national champions have already got sufficient capital in place and don’t need to tap the market at the moment,” said Gary Kirk, a London-based money manager at Twentyfour Asset Management LLP, which oversees about $3.9 billion of fixed-income assets. “On top of that, the market has been a bit difficult. Why issue into it if you don’t really need to?”
The yield premium investors demand to hold additional Tier 1 bonds rather than government debt has jumped to 453 basis points, approaching the most since the end of May, from 401 basis points on June 10, according to Bank of America Merrill Lynch’s High Yield Contingent Capital index. Spreads on investment-grade bank debt are 104 basis points, up from 98 basis points in the period.
Geopolitical events that helped stymie issuance in July are likely to continue to play their part in reducing lenders’ willingness to sell bonds, said Kirk at Twentyfour AM. Losses that have eroded the capital of Banco Espirito Santo SA in Lisbon aren’t helping, he said.
“There’s the situation in Ukraine and fighting in the Middle East, as well as the irritation that is BES,” he said. “Taken together and adding in the AQR, it all makes it more difficult to get a deal away.”