Nomura's debt capital markets team was an active bookrunner as market access for peripheral eurozone issuers was restored in the third quarter of 2012.
Nationality has been inordinately important for eurozone bond issuers in 2012. If the word ‘peripheral’ comes into it, that could add a couple of hundred basis points to the price or, much of the time, simply deny access at any rational cost. But there came a moment in the third quarter of 2012 when investors realised that nationality and credit could be distinct issues, and the resulting flurry kept Nomura’s Europe, Middle East and Africa (EMEA) debt capital markets (DCM) team rather busy.
While the international bond markets got off to a roaring start in 2012, much of the confidence and courage held by investors had fizzled out by mid-year. The European Central Bank (ECB) had fuelled the first bout of enthusiasm with its Long-Term Refinancing Operation and its boss would be responsible for the next burst of activity, though with words this time rather than deeds.
Towards the end of July, just as London was getting ready for the Olympic Games, ECB president Mario Draghi addressed the first of a series of UK government-hosted investment conferences designed to coincide with the sports event. If the organisers were hoping someone would make a splash, Mr Draghi obliged with great effect. Giving what he called a “candid assessment” of how his institution viewed the euro situation, he gave a commitment that no one had heard before. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said. “And believe me, it will be enough.”
Markets rallied considerably on the news, but it would be more than a month before Mr Draghi was able to put some flesh on those promising bones. None of the ECB’s policy-makers – mainly the eurozone’s central bankers – had been aware of his impending pronouncement, and there was much backroom horse-trading before Mr Draghi could unveil the Outright Monetary Transactions (OMT) programme, which promised unlimited bond purchases, though with a large helping of “conditionality”.
Market response
That was in the first week of September, and the mood truly lifted. “[In the previous few months] there had been a vacuum of liquidity,” recalls Nicholas Dent, Nomura’s head of EMEA DCM syndicate. “In the secondary market it was trading by appointment, with not many bonds available, so it was the primary market rally that drove spreads and drove investors’ willingness to get back into the market.”
Confidence was returning and was most obviously apparent, not in the core names where spreads were minimal, but in the peripheral names that were offering a marked step-up in yield. If the OMT had any one country in its sights it was Spain, and one of the first issuers to sense the new mood and act on it was Spain's largest bank, Santander.
“Santander was very quick to market, spotting the opportunity and seizing first-mover advantage,” says Mr Dent. With Nomura, Bank of America-Merrill Lynch, JPMorgan and Santander itself as joint bookrunners, the bank launched what would become its largest outstanding senior unsecured issue, on the morning following the OMT announcement.
Santander was certainly the first peripheral bank to respond to the changing mood, but it was not the first Spanish issuer. Taking a calculated gamble, Spanish telecoms operator Telefonica had come to market the day before the OMT announcement to raise €750m in a five-year transaction. The deal, which started with price guidance at about 510 basis points (bps) over mid-swaps, was 10 times oversubscribed and finally priced at 485bps over. That was still substantially more than its non-Spanish peers would have paid. Even though nearly 70% of Telefonica’s revenues come from outside Spain, it had to pay a premium for being a Spanish company. Investors suddenly realised they were being offered a good deal.
“The Telefonica issue was very successful,” says Morven Jones, Nomura’s head of DCM, corporate and sovereign, supranational and agency business. “Investors were separating sovereign headline risk from the underlying corporate risk. If you put the sovereign noise to one side, the spread was very attractive to investors and much higher than Telefonica would have paid if it was a similarly rated German or UK company – perhaps by 250bps more.”
Deep pockets
So the backdrop for Santander was encouraging, to say the least, but there was no cause for complacency. Execution risk was being minimised in a number of time-honoured ways. Timing was crucial, and the ECB announcement had ticked that box. On pricing, Telefonica had provided an insight into investor expectations. Another tick. “But what is crucial, and what you often cannot gauge until you are out there live, is market depth,” says Mr Dent. “Will you have the ability to price €1bn? Or €2bn? It is a key factor.”
They need not have worried. After a benchmark three-and-a-half-year deal was announced with initial price guidance in the mid-swaps plus 400bps area, orders worth €5.5bn flowed in within less than two hours. The demand allowed the pricing of €2.5bn at mid-swaps plus 390bps. Since that was the same spread Santander had achieved for a €2bn two-year deal in August, this was cause for great satisfaction.
With the tail risk of eurozone collapse removed, or so it seemed, the market was rallying. But there was precious little to buy, which always makes investors anxious about underperformance. “Santander was used as a proxy for peripheral exposure,” says Benedict Nielsen, Nomura's head of DCM and syndicate EMEA and recently appointed head of syndicate Asia, excluding Japan.
The deal’s distribution also told a positive story. The crisis had made European bond investors much more parochial than usual – they have huddled together for comfort with domestic issuers, and eschewed foreign paper. Santander’s distribution was reassuringly broad, with only 16% going to Iberia. The UK took 36% while German and Austrian investors, who have been conspicuously parochial, accounted for 21%. French investors bought 9% of the issue and Italians took 6%.
Further flurry
Only a day after the Santander deal, Telefonica returned to market to tap its five-year issue for another €250m. Except that this time the spread had raced in, from 485bps on Monday to 390bps on Friday. That was how keen investors were to not be left behind. The following week was the busiest for peripheral issuers in more than two years, as corporates lined up. Nomura was joint bookrunner for Gas Natural’s long seven-year €800m senior unsecured issue, one of the two longest transactions by a Spanish corporate this year.
The pool of peripheral financial institutions group (FIG) names able to come to market was also widening. “The rehabilitation of the market began with renewed appetite for the national champions,” says Sid Prasad, Nomura’s head of EMEA FIG global finance. “Then we saw the rehabilitation of second-tier institutions, which had been largely shut out of the senior unsecured market.”
One of a number that Nomura acted as joint bookrunner for was Italy’s UBI Banca, which launched a three-year deal in October, its first senior unsecured issue since the first half of 2011. It announced a benchmark transaction with guidance of mid-swaps plus 320bps area. Orders approached €1bn, which allowed the pricing of €750m at a spread of 315bps. The allocation was more domestically weighted than some others, with 41% going to Italy, but France took 18% of the deal and Germany and Austria took 12%.
Nomura was also joint bookrunner on a €500m three-year cedulas deal from Spain’s Bankinter, which took advantage of Moody’s confirmation of Spain’s Baa3 rating a couple of days earlier. Within 30 minutes the books had indications of interest totalling €1bn or more and pricing was tightened significantly from the initial spread guidance of 355bps area to 335bps.
Since September, the primary market has been altogether more functional, more amenable to longer maturities and different currencies and sectors. “We are more optimistic than we were a year ago,” says Mr Dent. “The market has not fully turned the corner, but next year we should see windows open for longer – not the same intensity of depth, but longer periods when deals can be executed.”
