FIG momentum builds as high NIPs trump uncertainty

Financial institutions issuance picked up through the first week of the year, helped by issuers offering healthy new issue premiums, and activity is expected to remain high next week, especially with uncertainty seen increasing as January progresses.

Fresh Grexit fears and uncertainty over the extent and timing of any European Central Bank sovereign QE meant that markets reopened in the new year with question marks hanging over them, although the prospect of further central bank action has kept a lid on fears of a renewed Eurozone crisis.

After a weak opening on Monday, public holidays in many parts of Europe on Tuesday meant that the reopening of the euro market faced a further delay, although that did not stop the sterling market from getting off to a strong start in covered bonds, with Barclays selling a £1bn three year FRN on Monday and Canadian banks raising a combined £800m of short dated issuance in its wake.

Euro FIG issuance took off on Wednesday, with Abbey attracting Eu5bn of demand for a Eu1.5bn seven year fixed rate senior unsecured deal at 65bp over mid-swaps and issuers including Bank of Nova Scotia, BFCM, Intesa, Lloyds, Rabobank and Société Générale also hitting the market, while activity picked up across other sectors such as corporates, insurers and SSAs in euros and dollars. The first euro covered bond of 2015 then hit the market on Thursday, with Westpac selling a Eu1.25bn seven year benchmark at 14bp over mid-swaps.

The week’s supply was well bid, with one syndicate banker attributing the reception to the level of new issue premiums.

“Oversubscription levels continue to remain elevated,” he said, “in part due to the NIPs that are on offer, with five to 10 year fixed rate transactions offering 20bp NIP at IPTs and landing with 10bp NIP on average.”

The new issue premium on Westpac’s covered bond, which was put at between 3bp and 5bp, was noted as being an increase on the flat to negative pricing versus secondaries seen on many issues sold in late 2014 on the back of the ECB’s third covered bond purchase programme.

The primary market is expected to be busy again next week.

“The FIG market is red hot and there will be an advantage to be the first mover next week as supply will continue to be heavy, particularly in the senior unsecured market,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB.

“Even if the liquidity situation remains exceptional there are some risk factors at back end of this month, and for the time being only positive news is priced in, starting with an imminent launch of QE.

“Front-loading is therefore the name of the game. At some point supply could weigh a bit on spreads in primary, particularly if fresh supply stops performing off the break.”

The ECB has a governing council meeting on 22 January when a QE announcement could be made, while Greek elections are on 25 January.

Covered bond issuance in particular is expected to pick up in euros after only the one deal this week.

“There will be a lot of activity next week, from the usual suspects in France and Germany,” said a syndicate banker. “We had the holiday on Tuesday so the second week is the first full one and the only week before the ECB makes its new announcements and before the elections in Greece.

“So I think a lot of issuers will decide to come to the market next week and to use the window, which is now pretty wide open.”

However, expectations of supply from the Nordic region are low given that many issuers are in or soon entering blackout periods. Nordea, SEB, Svenska Handelsbanken and Swedbank are going into blackout tomorrow (Friday) and other Nordic banks will follow them next week.