Short-end trap adds to peripheral bank funding woes

By Aimee Donnellan

LONDON, Oct 12(IFR) - Peripheral banks unwilling or unable to lengthen their maturity profiles are building up a redemption hump which they will have to face just as billions of euros of cheap ECB money is coming up for repayment.

Up until this week when Intesa Sanpaolo sold a EUR1bn seven-year unsecured bond, there had not been a single senior unsecured issue sold by a peripheral bank beyond the five-year point of the curve since 2010 - a stark contrast to the EUR216bn of five-year and longer senior debt sold by core European banks over the same period, according to IFR and Thomson Reuters data.

The focus instead has been at the short end, where banks have publicly sold EUR18bn of senior debt in the 18-month to four-year part of the curve in 2012 alone.

Elevated funding costs and a lack of investor appetite are the reasons for the short-dated focus. A two-year priced for BBVA at the end of September came at 325bp over mid-swaps, more than 220bp wider than where Credit Agricole sold a five-year issue this week.

This will contribute to the burden of debt peripheral banks have to refinance when the ECB's LTRO expires in 2014. Spanish and Italian banks borrowed around EUR545bn from the central bank in the December 2011 and February 2012 operations.

And while short-term funding might have shown that those banks have access to capital markets, their failure to sell bonds with longer tenors is now coming down to bear.

"With the first optional early repayment date of the LTRO coming up in December, a lot of people will be watching to see if Italian and Spanish banks start to give the money back," said Ralf Grossmann, head of covered bond origination at Societe Generale.


The Intesa seven-year trade might have been a welcome sign that things were easing for the periphery, but at 325bp over swaps, the bank paid more for funds than it is making from its lending business.

And while the issuer managed to lure a EUR4.7bn orderbook with more than 350 accounts participating in the EUR1bn deal, it is not expected to pave the way for similar issues.

"While Intesa was a great success, it is not something that can be replicated by everyone particularly from peripheral banks that are trying to be more economical in their funding," said Mauricio Noe, head of covered bond origination at Deutsche Bank.

Intesa's relative success also highlighted the struggle weaker credits from Southern Europe face when accessing the market.

Italy's Banco Popolare was forced to pull a deal due to insufficient demand, which followed Monte dei Paschi's struggle to gain traction in the market in September. MPS priced a barely covered EUR500m two-year issue at mid-swaps plus 450bp.

"The ECB and regulators are concerned about the refinancing needs of some peripheral banks," said Deutsche's Noe.

Their concerns are understandable considering that the cost of funding for the majority of Europe's banks has sky-rocketed, and the situation is all the more dire for Spanish and Italian banks, not to mention Irish, Portuguese and Greek borrowers that have no access to the market at all.

Issuers from Southern Europe regularly pay more than 400bp over swaps to issue two-year debt, and the average credit spread for European banks has soared over the past seven-years from mid-swaps plus 35bp in 2005 to around 200bp over, according to figures from Barclays.


Peripheral banks are quick to point out that they are in the process of deleveraging, so while they are in many cases locked out of the public market, they will have fewer funding needs in the future.

"Deleveraging is going on and it will speed up in the next months so liquidity should not be a concern in the short term," said a senior treasurer at a Spanish bank.

Spain's Santander and BBVA have already begun selling their loan portfolios as the country's bank and public sector finances have come under renewed pressure.

Last week Santander said it would sell a loan portfolio of up to EUR2.5bn to Bank of America Merrill Lynch. BBVA sold around EUR1bn of loans on an individual basis this year and the bank, which is strongly capitalised, has nearly met its target for disposing of loans.

Bankia is also preparing to sell EUR500m of loans, according to market sources.

However, bankers say deleveraging may not provide the panacea Spanish and Italian banks are hoping for.

"Deleveraging is certainly helping peripheral banks but it's not that easy when some of their assets are marked well below par and they are going to have to take a large capital hit to get them off their books," said Noe from Deutsche.

And while Intesa's successful seven-year deal is a notable exception, for the future, peripheral banks are pinning their hopes on rolling over short-dated bonds until the market improves.

If that fails, comments from president Draghi that the ECB would do everything in its power to secure the future of the euro have given fresh hope that the central bank will come through with yet more life-saving measures.

"The wholesale funding situation has not really improved for some of these issuers, which means they can either continue to fund at the short end and hope the market improves or the ECB will have to launch a third LTRO should volatility continue," said SG's Grossmann.

(Reporting by Aimee Donnellan; Editing Helene Durand & Julian Baker)

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