Capital Markets Weekly: Greek post-rescue success, jumbo BoC perpetual stand out in receptive markets

On 29 January, Greece raised EUR2.5 billion from a five-year bond sale, attracting demand of some EUR10 billion. The deal was priced yielding 3.6%, versus initial guidance of 3.75-3.875%. This was Greece's first major placement since it emerged from rescue in August 2018. On the same day, Belgium attracted EUR27 billion for a EUR5 billion deal due in June 2050 (31.5 years) priced at 1.746%, 44 basis points over mid-swaps. Austria also was in the market, gaining EUR28 billion of interest for a EUR5 billion syndicated 10-year deal. In addition, KFW gained a record EUR17.6 billion of demand for a EUR5 year benchmark.

Following recent regulatory changes permitting Chinese insurers to buy bank perpetual and subordinated debt, Bank of China impressively opened the bank perpetual market on 25 January. It placed CNY40 billion (USD5.92 billion) at 4.5%, versus a previously-reported range of 4.5-5.2%. People's Bank of China (PBOC), the country's central bank, later announced that the deal enjoyed a bid-to-cover ratio of "more than two", with over 140 investors including insurers participating.

Another major highlight was Ecuador's market return. On 28 January, Ecuador needed a 10.75% coupon to permit it to raise USD1 billion of 10-year bonds, versus initial guidance of 11%. Minister of Economy and Finance Richard Martínez reported that the deal was over three times subscribed with 220 participating accounts. However, outstanding debt fell sharply in response to the deal as Ecuador previously had indicated clear reluctance to pay a double-digit coupon for its borrowings.

Other indicators of market receptiveness include UBS gaining over USD10 billion of demand for an Additional Tier 1 perpetual deal, callable after five years. It lowered pricing from guidance of 7.625% to 7.375%, and sized the deal at USD2.5 billion. France's CNP Assurance followed the favourable precedent set by Generali last week, selling a EUR500 million tier two deal on 25 January. It tightened pricing twice from an initial 250 basis points over mid-swaps to 215 basis points, with demand of EUR3.3 billion. Telefónica's first Green bond - and the first from the telecom sector - also has been a clear success attracting EUR5.5 billion of demand for the EUR1 billion deal, priced at 90 basis points over mid-swaps versus guidance of 110-115 basis points.

Our Take

Greece's first issue since ending rescue support is a clearly-welcome development. The level of oversubscription indicates a clear success. Indeed, Greek Finance Minister Euclid Tsakalotos stated the issue had "exceeded all our expectations", emphasising that it was "very positive" that it had attracted so many long-term investors, with "a major shift from hedge funds to regular investors".

One possible note of criticism is that pre-launch, Greece was reported to have been seeking up to EUR3 billion from the sale. However, it is likely to have taken great care to ensure the deal's success, given that this was its first post-rescue reference deal, and thus to have focused on the quality of its order book as a priority rather than maximising the volume raised. In his statement, Tsakalotos flags that "the most important thing was the investor participation". The deal is prefunding future debt repayments, as Greece has built a cash stock to cover this year's repayments of EUR12 billion.

This does not remove very challenging underlying fundamentals. Greece still has a debt-to-GDP ratio near 180%, and after needing nearly a decade of international support, its access to markets is a "very delicate task", according to European Commissioner Valdis Dombrovskis, who flagged that Greece "doesn't have much room for manoeuvre and not much room for mistakes".
Overall, the heavy oversubscription for large deals by Greece, Belgium, Austria and KFW, with Belgium gaining near record demand for its deal despite its extended 31.5 year maturity, is obviously impressive and clearly indicates market receptiveness.

PBOC's perpetual sale also appears clearly impressive, both for the sizeable amount of perpetual debt raised and its oversubscription. However, China's central bank clearly has supported the sale of perpetual bank debt, not only by easing investment restrictions but also though announcing a central bank bill swap mechanism. The mechanism, announced on 24 January just ahead of the sale, allows holders of bank perpetual debt to use it as collateral for short-term borrowings from PBOC designed to "increase the financing support for the real economy".
Our Banking Risk Service views the provision of additional capital to Bank of China as likely to trigger similar sales by other major Chinese banks. At first sight, this is risk positive, improving capital buffers. However, large-scale subscription by state-controlled major insurers will increase risk interconnectedness within the financial system, implying deeper financial sector impacts if a major bank experiences problems. Additionally, to the extent that the new capital is used to boost lending in policy-favoured areas such as SME lending, it implies that credit exposures will be accumulated in these areas. This carries the risk that bank asset quality could be damaged over time, especially if inadequate lending standards are maintained.