It was a busy start to the year in the euro market overall, as financial institution borrowers executed €68 billion (US$72.6 billion) of new deals according to data from ING. This is almost double typical January volume over the past six years. The US market was relatively subdued but still active. The US$66 billion in financial primary supply is less than the US$95 billion printed in the same month last year but not significantly below average.

Duncan Beattie, Sydney-based managing director at Barclays, says the year’s high volume start can be attributed to a clutch of big-picture factors. These include a 25 per cent rally in credit spreads since October, well-navigated December central bank moves, relatively positive macroeconomic data from November and December, and a lack of geopolitical flareups over Christmas and the new year. “When conditions are good, issuers want to take advantage of it,” Beattie concludes.

In Europe specifically, significant inflows to credit funds and strong secondary performance also made a difference, adds Andrew Duncan, head of debt capital markets, Australia at HSBC in Sydney. While US activity was lower than usual, he continues, this was mostly the consequence of limited supply from local banks. Bank Yankee supply was 10 per cent up year-on-year.

“It is also worth noting that Asia came back in a big way despite the Lunar New Year-shortened month, with issuance volume up materially and investors playing a very meaningful role in primary trade momentum and follow-on secondary activity. This was particularly evident in US dollars but Asian demand helped distribution across almost all currencies,” Duncan adds.

It is hard to say for sure the extent to which high issuance volume is the product of conducive conditions in and of themselves versus an awareness of potentially more challenging times ahead.

Source: KangaNews February 2023

There is general market consensus that progressive global rate hikes will cut ever-deeper in 2023, which could send advanced economies into recession and cause a selloff in equities and credit. “Issuers that don’t need to do any funding are obviously not going to print deals. But I think there has been an element of doing prefunding while conditions are good,” Beattie says.

In effect, conditions have been so favourable that it made sense for borrowers to issue if they could find any rationale to do so. “European issuance garnered significant interest from financial issuers based on its neat mix of extremely favourable outcomes, including low execution risk, low landed cost of funds and diversification,” Duncan says. “Borrowers assessed this environment and ultimately thought – why wait?”

The Australian banks’ ongoing funding tasks are sufficiently large, especially in the context of forthcoming term funding facility maturities, that they are always likely to take advantage of primary-market windows. Simon Reid, Melbourne-based director, group funding at ANZ, says the bank is issuing to maintain consistent funding rather than pre-funding. The bank is taking disciplined approach to market, monitoring its balance sheet closely and taking opportunities as they present themselves, he adds. “We don’t have a firm view that conditions will deteriorate, but we do think it will be another window-driven year,” Reid tells KangaNews. “We are not pre-funding, but we are aiming to be proactive and stay on top of our task.”

The US dollar market was the first port of call for Australian bank issuance, with initial volume strong before tapering toward the back end of the month as primary supply slowed ahead of the Lunar New year period, central bank activity, inflation data and Australian bank results blackout periods. Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) issued deals in the first week of January with Macquarie Bank following a week later.

Fergus Blackstock, CBA’s Sydney-based head of term funding, tells KangaNews its US$1.5 billion two-year senior-unsecured transaction was opportunity driven. US dollar activity is part of the bank’s usual pattern of issuance and CBA plans to go back to the market again this year. But in this case the deal was prompted by competitive pricing in the short end of the curve.

Meanwhile, NAB opted for three- and five-year notes in the senior portion of its US dollar trade, which it executed the day after CBA’s deal. NAB’s two senior tranches were in fixed-rate format. Michael Johnson, executive, funding and liquidity at NAB in Melbourne, says the bank presented a three-year floating-rate note (FRN) option to investors but demand was not sufficient to pursue this option.

Even some investors that had previously been large supporters of NAB FRNs opted for the fixed-rate coupon. “Appetite for SOFR FRNs has decreased significantly since NAB’s transaction in January 2022, which reflects the interest rate environment and shifting investor preferences,” Johnson comments. “We chose to offer a three-year FRN tranche to investors to ensure it was available, however we did not need to rely on it proceeding.”

The US dollar market also provided opportunities for Australian banks to maintain their tier-two issuance run rate even as a question mark lingered over callable deal structures. Two Australian issuers priced tier-two paper in the US in January, both in the market’s traditionally favoured bullet style (see box below).

The flurry of euro issuance by Australian banks represents a rebound for the market after it proved uneconomical for these issuers for most of 2022. Westpac Banking Corporation was the first mover, with a €1.5 billion senior-unsecured three- and seven-year trade on 10 January. It was soon followed by peers.

Mitchell Cadman, associate director, global funding at Westpac in Sydney, says the issuer’s euro trade was sparked by the market’s strong performance in the first week of January. Plenty of liquidity was on show, and European issuers such as ABN AMRO and Banco Santander had managed excellent results. “These trades worked exceptionally well and demonstrated the depth of demand for short-dated senior bonds in the euro market,” Cadman says.

Pricing was also in the issuer’s favour. Barclays was a lead manager on the Westpac transaction and Beattie says the three-year tranche was consistent with pricing available in US dollars while the seven-year tranche printed 25 basis points tighter. “It was a good chance for Westpac to refresh its presence in the euro market and remain diversified,” he concludes.

ANZ had a similar experience with its three-year senior euro trade, which it priced a day after Westpac’s and at the same three-year margin. Reid says: “Investors were taking big volume and deals were performing well in primary and secondary markets. We have a preference for shorter-dated funding and noticed the success of Westpac’s three-year tranche. We received advice that we could broadly replicate what Westpac did so we decided to go ahead.”

The two borrowers say investors were very receptive to the trades despite the high volume flowing through the market and both banks’ prolonged absence from euro-denominated senior issuance. Neither had printed a senior-unsecured deal in euros since 2018.

“We should also remember that it wasn’t long ago that three-year euro senior bonds were at negative yields, which precluded issuance,” Reid comments. “The changed interest rate structure has greatly assisted issuance in this part of the curve.”

Beattie says Westpac has maintained euro market ties with covered-bond and tier-two issuance and received a strong result in its senior-unsecured return as a result. The bank accumulated €2.3 billion of demand across two tranches, which Beattie calls “a pretty strong response”.

In addition to its euro return, Westpac also found a window to issue a £750 million (US$904.7 million) covered bond on 4 January. Cadman says UK and Canadian bank covered-bond trades in the UK market performed well toward the end of last year and it was clear there had been significant improvement in the sterling market overall since the volatility caused by the local mini-budget in September and October. “The improvement in performance presented a good opportunity for us,” he comments.

This opened the deal to UK real money participation, Cadman adds. These buyers were not the main component of the book but showed good supplementary support. “The sterling covered market continues to be driven by UK bank balance sheet demand but it was pleasing to see the continued engagement of UK real money now volatility has settled down,” Cadman says.