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Mining liquidity in private bank placements
admin | July 12, 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.
Smaller, primarily non-index, US bank deals typically trade with low frequency and limited liquidity in the secondary market. Given the increased appetite for yield and the availability of some of these specific structures, more investors appear to be drawing out paper from the original noteholders, who may no longer have a need for debt with these specific maturity/coupon schedules.
Increased levels of debt from large community/small regional banks were introduced to the market during the 2014-2018 period; as smaller banks were able to take advantage of the low-rate environment, where investor appetite for yield enabled smaller issuers to tap previously inaccessible, semi-public debt markets. Typically bank sizes for this type of issuance have ranged between $500 million to $50 billion institutions, with deal sizes anywhere from single digit millions up to index-eligible size ($300 million). Funding needs varied from one-time growth initiatives to capital diversity, as well as regulatory capital needs.
The debt in this segment mostly falls into two separate structures, callable fixed-to-float deals that are now approaching their call/float dates (2020-2023 with 2025-2028 maturities), and mid-range fixed-rate bullet maturities. The former group is primarily issued as subordinated (Tier 2) out of either the bank holding company or the bank operating subsidiary itself, while the bullet structures come in both senior and subordinated tranches.
Exhibit 1: Examples of callable non-index bank paper. Yield-to-call (YTC) for these issues is typically in the 3.5 – 4.5% range (day-to-day liquidity highly subject, trade by appointment).
Source: Bloomberg, Amherst Pierpont Securities
For the callable cohort of bank debt (see Exhibit 1 below), investors are typically demanding compensation around the 3.50-4.50% range for yield-to-call of deals with faster approaching call dates 2020-2021 (depending on deal size, issuer credit quality, back-end FLT). Yield-to-maturity on these deals is ranging closer to 4.40-5.50%, but is mostly a less critical component to pricing. Issuers may very well leave these deals outstanding, despite some of the relatively high floating rate levels in the back-end (3mL +300-500 bp). This could either be due to the one-time nature of the deal, or a perceived lack of incentive for re-financing.
For comparison purposes, IG rated index-eligible bank debt with comparable duration to the callable cohort (in the 1.5-2.0 range) is pricing closer to a range of 2.3-3.8% yields. The bullet structures outstanding (see Exhibit 2) mostly have 2023-2026 maturities, and tend to draw interest in an average range closer to +250-300 bp spread (to the curve) or about a mid-4% average for the smaller bank deals, depending on bank and deal size and perceived issuer risk. Comparatively, IG rated bullet bank structures with similar duration (3.5-4.7) are mostly offering mid 3% range yields.
Exhibit 2: Examples of bullet bank paper. Bonds are mostly traded in the range of +250-300 (mid-4% average) on a spread basis to the curve (day-to-day liquidity highly subject, trade by appointment).
Source: Bloomberg, Amherst Pierpont Securities
For comparison purposes, investment grade (IG) rated index-eligible bank debt with comparable duration to the callable cohort (in the 1.5-2.0 range) is pricing closer to a range of 2.3-3.8% yields. The bullet structures outstanding (Exhibit 2) mostly have 2023-2026 maturities, and tend to draw interest in an average range closer to +250-300 bp spread to the curve, or about a mid-4% average for the smaller bank deals, depending on bank and deal size and perceived issuer risk. Comparatively, IG rated bullet bank structures with similar duration (3.5-4.7) are mostly offering mid 3% range yields.
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