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Greece puts brake on European high-grade dollar bank bonds

A protester raises Greek flag in front of the parliament during a rally against a new austerity package at Athens' Syntagma square
A protester raises Greek flag in front of the parliament during a rally against a new austerity package at Athens' Syntagma square

by Danielle Robinson

NEW YORK, June 16 (IFR) - Greece's precarious financial position has dealt a blow to the love affair US investors have had this year with European bank issuers in the investment grade dollar market.

Borrowers from across the continent and the UK are watching their spreads gap out well beyond their Financial Institutional Group (FIG) comparables in the US, regardless of whether they have Greek exposure or not.

Issuers are shelving deals until a window of opportunity opens as bankers tell them they'd be struggling to get enough demand for even a $1bn offering.

"There are definitely issuers who are looking at the market that ultimately may decide to stand down," said Dan Mead, managing director and head of FIG syndicate at Bank of America Merrill Lynch.

While higher quality European banks still have market access, "conditions are very volatile," he said. "Not only could it be very expensive, but depth may be limited."

Dollar spreads have widened on European Yankee bank unsecured senior debt by anywhere from 25bp to as much as 140bp since their tightest levels in April. US banks, battling concerns about their earnings potential in a continued weak economic environment, have suffered less, widening anywhere from 15bp on certain bonds, to 40bp from April tights.

Although the market was still theoretically open to higher quality names, "if you came to market now the market would think you had pretty dire funding needs," said a New York FIG syndicate manager at a European bank in New York.

Investors were indiscriminate in their abandonment of European banks. Their thinking, said one FIG syndicate manager at a US bank, was that "every European bank has Greek exposure, whether it's loans, counterparty risk or just inventory on their government trading desk. You can't get away from that."

SPREADS GAP OUT

Yankee Issuers as remote from Greece's problems as Nordea saw their spreads widen. Nordea's 4.875% of 2021s, issued at 160bp in January, were trading at a mid-point of 145bp this week, about 25bp wider than their 120bp tights in April.

That compares with JP Morgan's 5.375% of 2021s, trading this week at around 163bp, 15bp wider than its 148bp spread at issue in May.

At the other end of the European Yankee bond spectrum is Spain's Santander's 6.5% of 2014s, which have widened about 140bp to 622bp over Treasuries since their tights in April.

Societe Generale , one of the three banks Moody's Investors Service put on watch for downgrade this week because of its exposure to Greece, saw its 5.2% of 2021s, issued in April at 165bp, were trading around 228bp this week.

One positive is that globally banks have front-loaded their 2011 funding needs. Yankee FIG issuance has boomed this year, accounting for $152bn of the $250bn of total fixed and floating FIG deals year-to-date. European and UK FIG issuers account for $94bn of that $152bn.

"Some of the larger funders could sit out of the US unsecured market for the remainder of the year if they wanted to," said Mead.

European banks with large dollar requirements, especially now that regulators are pressuring them to better match dollar assets with liabilities, might prefer to stay out of the market as long as possible rather than ruin their yield curve with a widely priced deal.

Even so, another $30bn of European fixed rate FIG issuance is predicted for the rest of the year, according to Barclays Capital's credit strategist Ryan Preclaw.

"It's likely that issuers will come to the market once spreads stabilize. They still have funding to do," he said.

FIG spreads have deteriorated across the board since mid-May, but things worsened in the past week, not only because of news about Greece, but also because Moody's put Credit Agricole , Societe Generale and BNP Paribas , on watch for a possible downgrade because of their exposure to Greek public and private sector debt.

Renewed worries about bondholders possibly taking haircuts on Irish bank senior debt also spooked the market this week.

FIG bankers thought the US market was marginally better off than the euro market for bank issuers in that at least it's open.

"My sense is that the European market might be even more impaired than the US market in terms of viability of execution," said a senior FIG syndicate manager at a non-US Bank in New York.

Neither market looks viable until spreads at least stabilize.

"You need a stable backdrop and some national champion type borrowers to get out there and demonstrate there is a market, as well as to show how much new issues cost relative to secondary trading levels," said Andy Young, managing director and head of FIG European syndicate for Credit Suisse.

"If a couple of new transactions price successfully, then one could expect a pickup on the supply side from a wider range of bank issuers."

(Danielle Robinson is a senior IFR analyst)

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