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Early issuers face headwinds in volatile market

| January 11, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The tumultuous markets have put pressure on bank and finance issuers who are otherwise accustomed to accessing USD funding ahead of the 4Q earnings floodgates opening. The first quarter tends to be the most active for new issue volume for investment grade corporate bonds; thus far, 2019 has been more challenging than most issuers are willing to tolerate, with some deals pulled and others pricing wider than expected.

The following companies have been issuers in the past two January’s prior to 4Q results, but have not been able to issue thus far:

BNP *            LLOY *       ARCC           ABNABK *

SANUK *      BARC *     AL                 BBVASM *

CBAAU         ISPIM        BPCEFP       BAMACN

ACAFP *       CS *           NAB *         ANZNZ

ROBOBK *   BNS            SUMIBK *

* Repeat from Jan ’17
Source: Bloomberg LP and Amherst Pierpont

Market conditions closed up on another high-quality issuer in early December when ING had to pull its 15NC10 Subordinate (Tier 2 capital) issuance. Pulling investment grade debt deals is a rare event and in this case was due either to a lack of demand or poor pricing guidance, depending on where one sat. From one vantage point there was more than sufficient concession to entice buyers out as the initial price talk was +275A, or +50 bp over the INTNED 4.70% ’28 T2 bonds. Those do not have a call and 5-year floating period as the 15NC10 notes, but the effective cost of funding rises for the issuer as the Tier 2 capital treatment begins to amortize in the last five years of a subordinate bond’s life. That said, the pending new issue was expected to be called at the 10th year. Nevertheless, that deal never priced.

A month later BNP came to the USD market with a two-part senior non-preferred (SNP) new issuance in the form of 6NC5 and 11NC10 notes. Here again the notes were given very attractive initial price talk with +40 bp or more of new issue concession over comparable secondary levels. This was the first such callable SNP structure for BNP in the USD market, which would ordinarily not phase astute investors, but on Jan 3rd with this deal priced, the demand was vapid and pricing was only 5 bp inside of the initial price talk and effectively re-priced the secondary market wider as well. The wide spreads were evidence of a still-broken bond market, and within days there was some vindication of fair value pricing as the “risk on” trade helped drive spreads 25-30 bp tighter on the BNP notes as well as other solid credits that had gapped wider in recent weeks.

That risk-on trade has since enticed other issuers with higher credit risk to tap the market. On Tuesday, January 8th UniCredit not only came with a SNP 3-year, but was able to price it an unusually high 30 bp tighter than the IPT and those bonds have continued to trade favorably and are now another 28 bp tighter with solid volumes supporting levels. Based on the cheap price talk and a more favorable credit view of UCGIM than the spreads would suggest, there is still value in these notes.  Also able to price on Tuesday was the long-anticipated Marsh & McLennen (MMC: Baa1 neg/ A- neg/ A- neg) acquisition financing of the $5.6 billion purchase of JLT. All three rating agencies took negative ratings action on MMC when the JLT acquisition was announced in the fall, but despite the higher leverage the bonds priced close to expected fair value and have since performed better in the secondary markets. It is noteworthy that Fitch had initially put the A/Stable ratings on Credit Watch Negative at the announcement of the JLT acquisition, and downgraded January 10th to A- and left the outlook as Negative.

The last notable and troubled new issuance this week as that of Danske Bank (A2 neg/ A neg/ A neg), which is a long credit story in its own sense. However on January 9th there was additional and potentially material news around the bank’s alleged anti-money laundering violations. This story has been long-developing and has ensnared other banks in what could be the biggest laundering case to date. But as Danke has said it still needs to issue approximately $8 billion USD of SNP bonds in 2019 for regulatory needs, the company planned to pay the market price in light of its misgivings. The deal may still price on Friday January 11th, though precedent situations have shown that an additional concession to investors is necessary to get the bonds priced.

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jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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