Team Nov 2022

The bank’s global head of DCM believes the markets are becoming more resilient, but being able to act quickly on positive issuance windows remains paramount. Edward Russell-Walling reports.

While war, rising rates and inflation bear down on bond trading, financial institutions group (FIG) issuance has been the busiest segment of European debt capital markets (DCM). While DCM conditions can still change on a daily basis, the team at Société Générale believes that, in some ways, the direction of travel is turning positive.

Felix Orsini, Société Générale’s global head of DCM, acknowledges that the market remains very volatile, and that negative news flow can create a lot of difficulties and risks for the bank’s clients. “But there are some positive factors,” he says. “One is a growing feeling that the market is building some resilience.”

One resilience indicator, he says, is that the market no longer needs positive news flow to adopt a risk-on stance. “In the second quarter, it needed some positive news for that,” Mr Orsini recalls. “Now all it needs is for there to be no negative news.”

On the Monday, the system seemed to be collapsing. But then the Tuesday and Wednesday were super-active for corporate issuance

Felix Orsini

Another positive signal is that the market is rebounding more quickly. Mr Orsini refers to the extraordinary first full week of October. “On the Monday, the system seemed to be collapsing,” he says. “But then the Tuesday and Wednesday were super-active for corporate issuance as well as FIG.”

Société Générale was in the market with four deals that Tuesday, a €3.5bn long five-year benchmark for the European Financial Stability Facility, a €750m three-year covered bond for Singapore’s DBS Bank, and two €500m seven-year transactions for Smith & Nephew (inaugural euro) and EDP — all significantly oversubscribed.

The Wednesday was even busier, so much so that the DCM team asked The Banker to reschedule the interview for this article. They worked on nine transactions, including a €1.25bn seven-year green senior preferred transaction for BBVA, a €1.85bn five-year covered bond for French home loan refinancier Caisse de Refinancement de l’Habitat, a €850m eight-year senior unsecured deal for AXA, and a €500m three-year senior unsecured for ALD.

Timing the market

Yet another positive factor, according to Mr Orsini, is that the bank believes it can make a difference in a very challenging market by giving the right advice on timing.

He points to the decision by St Gobain, the construction materials conglomerate, to seize a window in early August for a highly successful triple-tranche bond issue. The deal consisted of three equal €500m tranches, in three, six and 10 years. The 10-year element was a sustainability-linked bond with Société Générale as sole structuring adviser.

The causes of market volatility have not gone away. “The key drivers are rates volatility, the inflation and growth outlook, central bank actions to fight inflation and geopolitical risk,” notes Eric Meunier, Société Générale’s head of DCM FIG origination. “But whenever we see some stability, that’s a condition for reopening the market.”

The bank started the year with the view that rates would go up, though the market in general was surprised at the speed with which they increased across euros, US dollars and sterling. “There is still potential for rates to go up,” Mr Meunier adds. “Our target for 10-year bonds is 2.8% in the first quarter 2023.”

Rupert Carter w caption

For would-be FIG issuers, this year has been an emphatic case of the earlier the better. As rates and spreads have continued to widen, each transaction done has been cheaper and tighter than it would have been a few weeks later, Mr Meunier observes.

Nonetheless, he believes large European banks anticipated the situation quite well. “My guesstimate is that European banks have completed 85% of their 2022 funding programmes — though some are already complete and others may have to wait until next year if they don’t have access to the market.”

The price they have had to pay includes a widening new issue premium. It began the year at zero to 5 basis points (bps), depending on the issuer, and has now increased to 25 to 35bps. A greater investor focus on liquidity has meant that rarer names, or those from less economically-sound jurisdictions, have had more difficulty with access, according to Rupert Carter, head of FI syndicate.

Covered bonds

If there is a star of the FIG euro market right now, it’s the covered bond, which last year saw total issuance of around €100bn. “This year we have already seen €170bn of covered bonds,” Mr Meunier says. “We are returning to the levels of a few years ago before the focus moved primarily onto minimum requirement for own funds and eligible liabilities (MREL) requirements.”

He adds that banks are currently well-positioned in terms of MREL. Some banks in southern Europe still have a shortfall, but some in Greece and Portugal have been given more time to comply.

Covered bond issuance is being boosted by disadvantageous changes to the European Central Bank’s targeted longer-term refinancing operations. These are prompting early repayments, which need to be refinanced.

Société Générale was joint bookrunner of Banco Santander’s first soft-bullet covered bond, a dual-tranche transaction that was also the first under Spain’s new covered bond law. A five-year 2.375% and a 10-year 2.75% tranche were launched with guidance of mid-swaps plus 25bps and 45bps area, respectively.

There is still potential for rates to go up. Our target for 10-year bonds is 2.8% in the first quarter 2023

Eric Meunier

The final terms were €2.25bn of the five-year and €1.25bn of the 10-year at spreads of 20bps and 42bps. Final demand was around €4.8bn in total. “One positive is the return of real money investors to covered bonds,” Mr Meunier says. “The driver is that they offer nice value versus sovereigns.”

The bank was joint bookrunner on Royal Bank of Canada’s €1.5bn five-year 2.375% mortgage covered bond. This was RBC’s fourth covered bond in the euro market this year, having pulled off two €2bn trades in January and March and a €1bn deal in May. Guidance was tightened from +20bps area to a final 17bps.

Mr Meunier notes that the euro market has seen €27bn of issuance from Canada, compared with €12bn last year. “The positive trend for covered bonds will continue into 2023,” he believes.

Open for business

The market remains open for more subordinated transactions from lesser known and less liquid issuers, even from southern Europe. A good example was Italy’s BPER Banca, which was able to print a €400m 10-year non-call five Tier 2 bond. It had to pay up, with an 8.625% coupon, but the books were opened at 9% area — collecting orders from more than 100 investors and 57% of the allocation went to non-domestic accounts. Société Générale was joint bookrunner.

Shrewd timing played a part in BPER Banca’s success, as it did when Banque Fédérative du Crédit Mutuel (BFCM) came to market with a euro-denominated dual-tranche senior preferred transaction. BFCM is the funding arm of Crédit Mutuel Alliance Fédérale, a French co-operative banking and insurance group which belongs to its members and has 27 million customers.

With Société Générale as a joint bookrunner, BFCM made its fifth foray of the year into the senior preferred market, having already issued in sterling, euros, Swiss francs and US dollars. It announced a five- and 10-year deal with initial price thoughts of +115bps and +145bps area.

Investors were keen and more than €5bn of orders were logged, skewed to the five-year. The transaction was finally sized at €1.5bn for the 3.125% five-year tranche and €750m for the 3.625% 10-year. Final spreads were 90bps and 120bps respectively, implying 15/20bps of new issue premium.

Austria’s Raiffeisen Bank International (RBI) was also able to seize the right window with a €500m 10.25 non-call 5.25 subordinated Tier 2 issue. “Though RBI is a well-known national champion, its spreads have been under pressure because of its exposure to Russia and eastern Europe,” Mr Meunier says. “But it has been very present with investors all year, answering their questions about its presence there.”

That work paid off when the no-grow deal, with Société Générale  as joint bookrunner, attracted orders of more than €2.5bn. This allowed a strong tightening from initial spread thoughts of +575bps area to a final +520bps — the largest such move in a euro Tier 2 in 2022.

Bank treasuries have had to adapt to a significantly increased cost of funding, and some may start pre-funding for 2023 before the end of this year, Mr Meunier says. “Others want to see how deposits evolve,” he says. “These increased during Covid-19, but will they continue as a source of funding in 2023?”

Market progress continues to be a day-by-day affair. Is most of the bad news priced in? It is difficult to tell, but investors will need to feel that the inflation peak has passed before conditions get back to any kind of normal.

“When we see the normalisation of central bank speech on inflation, that will be a very positive driver,” Mr Meunier reckons. “It’s difficult to say when that will be but, in my opinion, perhaps in the first half of 2023.”

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