By Alice Gledhill
LONDON (IFR) - It was easy to point the finger at Brexit after recent senior euro trades from Barclays (LON:BARC) and Royal Bank of Scotland (LON:RBS) failed to whip up much demand, but timing and heavy competing supply arguably played as much, if not more, of a role.
RBS Group accrued €1.2bn in orders for its €750m 6.5NC5.5 (Baa2/BBB-/BBB+) on Tuesday, pricing just 3bp inside initial price thoughts at swaps plus 167bp. The outcome recalled last Friday's €750m Barclays five-year (Baa3/BBB/A), which drew a €1.1bn book and landed 5bp inside IPTs at swaps plus 130bp.
UK lenders have been grappling with the implications of an exit from the European Union ever since the referendum in 2016, the outcome of which has left investors wary of performance risk in the near term and their future fundamental trajectory.
"I think the UK (banks') investor base is smaller than for other Northern Europeans, and I think that's been true for a while," said one syndicate banker.
He suggested that for UK-focused banks like Barclays and RBS, €750m rather than €1bn is arguably the best they can hope for.
All five euro-denominated UK seniors since Nationwide's €1bn senior non-preferred in March have been €750m or smaller, and the sector trades cheaply compared to most other European jurisdictions.
Worryingly, investor appetite is waning just as banks across Europe have to raise billions in loss-absorbing debt to meet regulatory requirements. While dollar issuance is a viable alternative, funding officials cannot rely on that market alone.
Though UK lenders have taken a large bite out of their targets, there is still some way to go - and spread volatility is only likely to increase as politicians attempt to thrash out a deal in the coming months.
"[UK issuers] are worried about what happens to demand for UK risk as we start to get all this brinkmanship around Brexit as we go later in the year," said a second banker.
"My understanding is that the UK was quite a large driver of demand for the RBS and Barclays deals, so the overall demand itself was quite limited and even then, was dominated by the UK."
Domestic investors took 57% of allocations in the RBS deal. Barclays did not disclose distribution statistics.
FALSE NARRATIVE?
That said, the decision by Barclays to print in a weakening market after heavy supply - and without a particularly generous concession - was perhaps the primary reason for its limited momentum. The bond initially widened 3bp.
"That deal created a narrative that there is a problem with UK risk, and RBS has suffered from that despite the fact that [its deal] was fairly sensibly priced," said the second banker.
Indeed it is not just UK paper that has failed to prove a must-buy. While HSBC France, Commerzbank (DE:CBKG) and Rabobank have all pulled in multi-billion books in recent days, executions for OP Corporate Bank and Banco de Sabadell have looked more challenging, for example.
Banks have now priced more than €14bn of senior unsecured paper in the past two weeks in the biggest burst of activity since March, leaving investors spoilt for choice.
"Add to this the Brexit backdrop in the UK and I think it makes holdco senior an easy pass for investors given it's easy to sit around and wait for the next cheap new issue," said Lloyd Harris, a fund manager at Old Mutual Global Investors.
"There is an imbalance of supply and demand at the moment, and that tends to show up in smaller books in the perceived weaker names or those names that have a story attached to them."
HAPPILY OVERWEIGHT
While execution was not plain-sailing, it has been a happier story in the secondary market. Barclays was better bid at 127bp on Friday morning, while RBS was considerably tighter at 155bp.
For all the uncertainties ahead, UK banks are still in decent shape when it comes to key credit metrics, and a stringent regulator has ramped up capitalization levels ahead of other European jurisdictions.
And while Brexit has clearly weighed on UK bank spreads, other factors specific to the sector such as ring-fencing - the separation of retail and investment banking activities - have also taken their toll as investors digest the changes.
"Generally, UK banks look quite good at the moment," said Harris. "We're overweight UK banks and happy to be so, I think it's a good opportunity. It would amaze me if there's not a [Brexit] deal."
Growing numbers of buyers might come round to that view, particularly if further weakening makes UK valuations too attractive to pass by. The group of accounts that refuses outright to touch UK bank paper is small and fairly static, bankers said.
"When you do look at the nuts and bolts of the banks, they look pretty good - I wouldn't stay away from any one of the UK banks because I'd be worried there is some imminent collapse ahead," said Gregory Turnbull Schwartz, a fund manager at Baillie Gifford.
"But I think a lot of people might have that same view - of holding off for the moment and being prepared for spread widening; and if there is some disruption during the key Brexit time frame, that might be a nice buying opportunity."