29th January 2018

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While Mario Draghi, Davos and Trump dominated headlines last week. It was the pricing in the European New issue market which caught the attention of our Credit Team…
New issues that priced last week highlighted the immense strength of the European Credit market, with investors appearing to shrug off concerns linked to quantitative tightening measures from the ECB in the upcoming 12-18 months.

We set out our thoughts on some of this week’s issues below:

Belfius Bank € Debut AT1: Belgian Bank; Belfius Bank priced a Perp (Non-Call 4yr) AT1 at 3.625%. Order books were said to be 8x covered and the bond was said to have traded to a premium intraday (25th January 2018). Belfius formed the retail operations of Dexia, which was bailed out by the French and Belgian Governments during 2011/12.

IKB € Tier 2 – German Bank; IKB issued an unrated 10 year Non-Call 5 Tier 2 notes at 4%. IKB required bailouts from German Development Bank KFW and the German state after running into problems with its off balance sheet vehicles in 2007.

Auchan € FRN – The private French Supermarket and Hypermarket operator issued a 2 year FRN at 3m Euribor + 5bps, which tightened in from Initial Pricing Talk (“IPT”) from +20-25. 3m Euribor was negative (-0.33%) on the pricing date (26 January 2018). The issue is rated BBB+ (S&P).

UBS $ Perp Non-call 5 years AT1 @ 5% – Order books were said to be $8.25bn for this $2bn issue. The reset after 5 years is mid-swaps + 243.2.

Based on the sample above, our key observations were:

  • Strength of demand for companies with recent chequered history (i.e IKB, Belfius)
  • Subordinated structures achieving very low coupons
  • Highly attractive pricing for Treasurers of BBB corporates in Europe

The key driver underlies the pricing of these new issues is the abundant liquidity put in to the system via the ECB’s unprecedented stimulus measures. This has left very little margin of safety against a widening of credit spreads or a rise in Government bond yields.

We remain cautious on the pricing in the new issue market, especially as we enter a period of tightening by the ECB over the next 12-18 months.

Sources used: Bloomberg, Reuters

The views above are published solely for information purposed and are not to be construed as a solicitation or an offer to buy or sell any securities, or related financial instruments. It does not constitute a personal recommendation as defined by the Financial Conduct Authority (“FCA”) or take into account the particular investment objectives, financial situations or needs of individual investors. The views above are based on public information and sources considered reliable.