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US investors swamp BBVA as periphery regains favour

Friday, 5 Oct 2012 | 4:18 AM ET

By Danielle Robinson and Andrea Johnson

LONDON, Oct 5 (IFR) - In a startling change of fortune, Spain's BBVA was swamped with USD7.5bn of demand for a USD2bn three-year Yankee bond yesterday, the first time US investors have shown interest in buying Spanish financial risk in more than 17 months.

The deal, led by Bank of America Merrill Lynch and Morgan Stanley, was made possible by what was rumoured to be a whopping USD1bn reverse inquiry from two of the biggest US investors, believed to have been Pimco and BlackRock, now that Spain has the offer of European aid to recapitalise its banks.

That kind of investor commitment even before the deal is announced, along with a 450bp initial price thought to stir the animal spirits, brought investors rushing into BBVA's three year, a maturity, not coincidently, that puts its redemption before the expiration of the ECB's LTRO liquidity facility for banks.

Societe Generale also pounced on the change of heart among US investors toward the highest yielding Yankee bank names, to issue a USD1.25bn five-year, led by Citigroup, SocGen and Credit Suisse.

Now expectations are that Santander and some of the best Italian banks will try their luck in the US market.

"It's pretty clear to us that the market is now open to buying these kinds of bank names," said one banker.

BARGAIN HUNT

US bond buyers are turning to the Yankee bank sector's most high beta credits for yield, now that several months of investor rotation into US banks and the better rated Yankee FIG paper has cleaned out most of the obvious (FIG) bargains.

That, and the fact that the ECB has taken a lot of the tail risk out of the market, has made banks in the peripheral zone more attractive - as long as they offer a lot of spread.

"We wouldn't have been confident that this kind of deal could get off the ground even just two weeks ago," said one banker away from the BBVA deal.

"A month ago there would not have been any price people would have taken Spanish bank risk for," added one investor.

At a price of 435bp, BBVA's deal offered about a 15bp pickup to its own secondaries, on a curve-adjusted basis, and about 62bp more in spread than Santander's 3.781s of 10/7/15s at G+373bp.

Demand was so strong that the BBVA bonds tightened as much as 50bp in the after market, before settling around 405/395bp late Thursday.

Although BBVA clearly needed a huge reverse inquiry and spread to get investors over the hump, it is unlikely other Spanish or Italian banks will need to do the same now that BBVA has broken the ice.

Also, BBVA and SocGen were well received because there isn't much left in the Yankee FIG space that offer any yield.

"The market is perpetually looking for yield and in the Yankee bank community there is only a handful of names left that offer that yield," said one syndicate manager.

SocGen started out with 230-235bp whispers for a benchmark offering, put guidance out at 220bp area and priced a USD1.25bn 2.75% 2017 at 215bp to yield 2.767%, after building a USD4.5bn book.

It benefited from improvement in Credit Agricole's five-year trade done last week, which initially gapped out about 10bp from its 235bp launch spread but was on Thursday trading around 230/220bp.

Unlike Credit Agricole, SocGen issued decided not to issue under rule 144A but instead take the more public 3(a)(2) route, which opened it up to a wider base of investors and made the deal index eligible.

That saved it about 5bp according to some and ultimately it was seen to have priced its deal at flat to negative 5bp.

Soc Gen paid about 25bp more than where it could have done a similar euro trade, while BBVA was seen to have issued flat to about 10-25bp through what it could do in euros.

(Reporting by Danielle Robinson, Andrea Johnson)

((helene.durand@thomsonreuters.com; +44 207 542 3469; Reuters Messaging: helene.durand.reuters.com@reuters.net))

Keywords: BANKS/FUNDING

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