Banks weigh cost of euro rescue fund business
By John Geddie
LONDON, Oct 12 (IFR) - Balance sheet intensive trades and requirements for committed credit lines have seen many banks complain about the pressure exerted by the eurozone rescue set up, just as the European Stability Mechanism gets set for its first ever bond issue.
Normally the launch of a new fee-paying capital markets issuer such as the ESM would have dollar signs glinting in the eyes of the banking community, but a mixed experience with its predecessor, the EFSF, has left bankers wary.
"Really you have to get two mandates from the EFSF a year to make it worth your while. If you get just one, or the wrong deal, it can prove costly," said one SSA syndicate official.
According to IFR data, lead banks who have received less than two benchmark (non-tap) mandates so far this year are Barclays, BofAML, Commerzbank, Credit Suisse, DZ Bank, Goldman Sachs, Natixis, Nomura, RBS and SG CIB.
Deutsche Bank, RBS and SG CIB are tipped to be on the top line for the ESM's first deal in January after being appointed for the ESM's European roadshow starting this month. The new issuer will have a market group comprising 43 banks, just like its predecessor.
In order to be eligible for a mandate on the EFSF's syndicated deals banks have had to maintain a 2.5% share across all the issuer's T-Bills and auctions, said bank sources. The competition to meet this quota has resulted in EFSF T-Bills carrying negative yields in recent issues.
This is not the only cost banks face. Over the last year many banks have now been asked for unsecured and secured credit lines as the EFSF looks to put in place an additional EUR10-15bn capital buffer, confirmed sources.
When the EFSF's funding exercises are well-received, banks can find the remuneration sufficient to compensate. However, when they go badly, as with the EFSF's last 10-year benchmark, all members of the market group can end up with underperforming bonds.
One bank said that the formal communication from the EFSF states that members of the group can opt out of their fill of bonds and it will not affect future business with the EFSF. But the reality, he added, is that nobody wants to take that risk.
EFSF's last EUR3bn fundraising effort was reported as being sizeably undersubscribed and in the immediate aftermarket widened out 7bp.
The market group was allocated EUR360m of underperforming bonds, said banks close to the deal, with the leads left to prop up the rest of the shortfall.
Bankers away from the trade said that for some of the leads on the deal, the fees were not even enough to cover losses on the bonds.
Not all EFSF's deals have been quite so challenging - far from it, and in fact, some blowout trades have left banks handsomely remunerated.
In order to get to that stage, however, banks first have to curry favour with the issuer.
At the beginning of this year the EFSF began discussions with banks for unsecured, uncommitted credit facilities to create a short-term liquidity buffer, allowing the EFSF to meet disbursements if conditions in the capital markets were not optimal. Backstop credit facilities are also looked on favourably by ratings agencies as alternative sources of finance.
By the summer, EFSF stepped up discussions with a select group of banks to include committed facilities secured against EFSF T-Bills. So far only one bank is known to have agreed to a EUR2bn facility across both lines, while other banks complain that the onus being put on them is too great.
"From a regulatory point of view the cost of putting a secured line in place is quite substantial, and far greater than say raising the money in the markets would be," said one banker.
Another added: "I think it is unnecessary for these entities to put this kind of pressure on banks."
Other houses refused to comment, stating that bilateral discussions were confidential.
When asked if banks had shown reticence to commit to such facilities, a spokesperson for the ESM said: "The EFSF has received very positive indications from a wide range of banks."
"A few discussions are still ongoing and the total amount will be in line with expectations," he added.
Banks now expect the ESM to request similar facilities, although the spokesperson said the ESM has not started to discuss such lines at the moment.
(Reporting By John Geddie; Editing by Alex Chambers and Julian Baker)
Keywords: ESM EFSF BONDS/