Europe banks find a rare funding window in August
MADRID (MarketWatch) -- Some European banks are taking advantage of this month's calmer markets to meet funding needs by issuing corporate bonds, but that window of opportunity could slam shut on their fingers come autumn.
Subsiding turmoil in European government bond markets has made it easier to issue corporate bonds, with yield-hungry investors willing to step in and buy.
Spanish bond yields have retreated from crisis levels as European Central Bank President Mario Draghi pledged the bank would do "whatever it takes" within its mandate to preserve the euro. Meanwhile, U.S. and German government bond yields continue to slide.
Meanwhile, corporate borrowing costs have declined as spreads between corporate debt and benchmarks tightened.
"The spread tightening does signify a degree of change in investor risk appetite and somewhat greater confidence in banks as well as the underlying sovereigns, driven largely by the ECB comments," said Elisabeth Afseth, fixed-income analyst at Investec.
Draghi, however, may need to provide more details in order to "drive it further," she said, noting bank spreads "have widened out with peripheral spreads over the last few days."
As peripheral bond markets have rallied, pulling down yields, equities also recovered. The Stoxx Europe 600 index (SXXP) is up over 6% this quarter, with the banking sector (SX7R) just about matching that.
It's not just a European bank phenomenon. August global corporate bond issuance is the highest on record for the month, at nearly $120 billion so far, according to data from Dealogic. In Europe, issuance totaled $13 billion from $40.5 billion in the prior month. August is traditionally among the quietest month for corporate bond issuance.
Investors are now awaiting further details of a bond-buying plan outlined by Draghi on Aug. 2. For now, market participants appear to be giving him and other central bankers the benefit of the doubt.
Along with central bank stimulus hopes, a lack of new supply has driven corporate bond yields down across the board, said Michael Symonds, credit analyst at Daiwa Capital Markets. He said this has been intensified by the ECB's decision this summer to cut its deposit rate to zero.
"Bank bonds might look attractive, from a spread perspective, compared to other securities such as government and agency bonds where yields have been crushed," said Symonds, who expects more banks will try issue additional bonds in the remaining days of August.
The ECB has ramped up lending to euro-zone banks since the start of the financial crisis more than four years ago, as those with sovereign-debt baggage have found it near impossible to get market funding. As of Aug. 17, ECB loans to euro-zone institutions related to monetary policy operations stood at 1.208 trillion euros ($1.508 trillion). At the end of 2007, lending was €617.1 billion.
As for banks getting busy, last week
But Symonds said investors, most of whom are institutional or pension funds, are still well aware of risks, which is evident in the spreads. The midpoint spread for Dutch bank
Investec's Afseth said banks should enjoy the open funding window while it lasts.
"With investors cash rich, high quality issuers with low exposure to the periphery are likely to remain popular and we could well see spreads at least hold the current levels and possibly trade a little tighter from here," she said in emailed comments.
But Afseth said several issues will affect that tightening, including the European sovereign crisis, and banking union regulation, which could come with harsher bank resolution terms and risks to debtholders.
"Then there is the economic situation, fiscal austerity weighing on the economy and affecting bank asset quality and earnings potential," Afseth said.
September is packed with events for markets -- a German constitutional court decision over legal challenges to the European Stability Mechanism, an audit of Spain's banking system, and Federal Reserve and European Central Bank meetings. These could prove a major hurdle for banks if markets turn volatile again, analysts said, given the tendency of the asset class to sell off first when investors turn risk averse.
Looking ahead, Symonds said peripheral banks will continue to seek out the ECB's support, and look for the central bank to commit to a new multiyear long-term refinancing operation and further loosen collateral rules. He added that some banks may struggle to come up with sufficient collateral to post with the ECB in return for funding.
The big banks without pressure to come to the market have nearly or fully completed their 2012 funding needs.
"That being said, if conditions permit, these banks would ideally like to begin pre-funding 2013 needs. Ability to pre-fund will be dictated by the actions taken by decision makers in Europe, commencing with those pivotal events in September," Symonds said.