Saturday, January 5, 2013

Yankee banks bonds are lining up price next week

stock market today - Yankee banks bonds are lining up price next week january 7 - 11 2013 : Yankee banks are lining up to price about US$16bn of bonds in the week ahead, as they look to strike while US banks are likely to stay out of the market because of self-imposed earnings blackouts.

Syndicate desks are expecting about US$25bn of new deal volume next week, about 65% of which will come from the Financial Institutions Group (FIG) sector - primarily Yankee banks.

"It's going to be busy, and I think you will see representation from all parts of the world in the FIG new-issue space," said one head of FIG syndicate at a major Wall Street bank.

The Yankee banks are expected to issue in a variety of forms, including senior unsecured, some capital securities issuance like subordinated debt, and some covered bonds. No contingent convertible bonds are believed to be in the pipeline for the week ahead.

Favorable swap rates, at least from the perspective of the eurozone banks, are driving issuance, enabling them to issue dollar denominated short-dated bonds at around the same cost as the price of new bond issues at home with the same maturities.

"From an economic standpoint the cost of issuing is similar to what they could achieve in local currencies, but what they are finding is the capacity is potentially larger in the US, and clearly the tone is very strong for FIG paper at the moment," the syndicate head said.

Although European banks are in deleveraging mode, it makes sense to achieve or maintain a foothold in the US bond market, to diversify sources of funding.

Yankee banks that have shown a preference for January issuance include Bank of Nova Scotia, which aimed for issuance in the first weeks of the year in 2011 and 2012, as did Sumitomo Mitsui Banking Corp and Banco Bradesco Cayman Islands.

Rabobank, the cream of the European crop, has also tended to come to market in January.

Barring unforeseen events or overly aggressive pricing, the Yankees will almost certainly receive a strong welcome from US investors, who continue to focus on FIG as a way of getting the best investment-grade bond returns.

Last year the FIG sector of the Barclays corporate index, which includes Yankee bonds, achieved by far the best excess returns in the investment grade market.

The FIG index ended 2012 with a spread of 145bp, 216bp tighter than where it was at the end of December 2011. Bank spreads are now only 12bp away from trading on top of US industrial paper, the tightest that differential has been since 2007.

The US FIG sub-index of the Barclays investment grade corporate index, which includes SEC-registered Yankee bank issues, provided investors with excess returns (which exclude the Treasury portion of a corporate bond yield) of 13.56% last year, compared to 7.34% for industrials.

Investing in subordinated FIG paper reaped even greater excess returns, at 16.86% versus 12.76% for just senior unsecured issues.

Some US investors are also looking at euro-denominated bank debt.

Excess returns on European Yankee FIG paper denominated in euros was 8.97%, according to Barclays, but those that bought subordinated euro bank debt received almost 24% returns.

The returns on perpetual preferred issuance by banks were so stunning that some traditional fixed income investors are looking to get into that market for the first time this year.

"I am looking at going down the capital structure of the banks and buying capital securities like perpetual preferreds," said one investor. "The returns on these securities have been off the charts - some as high as 30%."

Further spread tightening is expected for both US and Yankee bank names this year, despite last year's extraordinary performance.

Barclays is recommending that investors buy the higher-beta US bank names, like Bank of America, Goldman Sachs and Morgan Stanley.

Investors are also seeking out Yankee bank issuers with more spread compression potential, like eurozone names. This week names like Barclays and Royal Bank of Scotland enjoyed twice as much spread tightening as US names after news of the fiscal cliff deal in Congress.

Barclays 7.625% 2022s, for instance, traded 29bp tighter at T+560bp, while RBS 6.125% 2022s were 20bp tighter at 343bp over Treasuries on Wednesday, the first trading day after the deal was announced.

That compared with 12bp tightening of 10-year benchmark bonds of Bank of America, one of the highest-beta US names.

"We expect to see continued spread compression between the US banks and industrials, and especially for the higher beta names like Morgan Stanley and Bank of America," said a leading FIG analyst.

"We're also interested in the eurozone Yankee banks. We expect they generally will continue to reduce their amount of outstanding debt. We saw RBS tender for dollars and sterling bond series this week, for instance."

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