FIG
US DOLLARS
BANKS RETURN TO THE US HIGH-GRADE
BOND MARKETBANK OF MONTREAL and KEYBANK tested their
resilience to continuing spread widening on
4HURSDAYûWHENûTHEYûJOINEDûlVEûOTHERû
investment-grade bond issuers in yet
another volatile day across markets.
After bouncing on Wednesday following
Democratic presidential candidate Joe
Biden’s surge in the primary elections, asset
prices are once again heading south on fears
of the widening reach of the coronavirus
and its impact on global growth.
The Dow Jones index tumbled 1,000
points, yields on the US 10-year Treasury hit
fresh lows and credit spreads were widening
again on Thursday.
And with falling rates seen hurting bank
REVENUES ûBANKûANDûlNANCIALûSPREADSûFACEDû
some of the largest spread changes over the
prior 10-day period, moving 29bp and 34bp
wider, respectively, according to ICE BofA
data.
Even so, KeyBank moved forward with a
53MûTHREE
YEARûlXED
RATEûNOTE ûWHILEû
BMO came with a US$1.5bn three-year
mOATER ûITSûlRSTûTOûREFERENCEû3/&2
Reverse enquiry drove demand on the
BMO deal, allowing it to upsize to US$1.5bn
from US$1.25bn, according to one banker
on the deal.
But syndicate desks were quick to put the
trade to bed amid heightened execution
risks, jumping straight to launch from
initial price thoughts and pricing before
noon.
The bank landed the bond at 68bp over
SOFR, notably higher than the 48bp where
Canadian competitor TD priced a three-year
mOATERû*ANUARY
But BMO did come tight to the Truist
THREE
YEARûmOATERûTHATûPRICEDûATûBPûOVERû
SOFR on Wednesday and tightened 24bp
through price progression (see separate
story).
"-/ûALSOûBENElTEDûFROMûANûUNDERLYINGû
SOFR level that sank dramatically after the
Federal Reserve made an emergency 50bp
rate cut on Tuesday. It fell to 1.23% on
Wednesday from 1.64% the day before.
Cleveland-based KeyBank, meanwhile,
OFFEREDûINVESTORSûAûTHREE
YEARûlXED
RATEûNOTEû
that tightened by 20bp through guidance to
65bp over Treasuries.
Despite the strong tightening, the note
still landed some 9bp wide of KeyBank’s
3.375% March 2023 that was last seentrading at G-spread of 56bp, according to
MarketAxess data.RETURN OF THE BANKS
Corporate issuers led the charge to restart
the US high-grade bond primary last week,
driven by a desire to lock in low coupon
rates.
But banks then followed after a
stabilisation in average US credit spreads at
132bp over Treasuries, according to ICE
BofA data.
Nevertheless, banks’ emphasis on spreads
over coupon may dampen their incentive to
issue.
h4YPICALLY ûlNANCIALSûAREûMOREûSPREAD
focused and corporates are more
coupon-focused,” one banker away from the
trades said.
“The coupon borrowers are very
comfortable, whereas if you focus on spread
you’re much worse off now then you were
two weeks ago.”
Financials are also hurting from the move
lower in rates, and investment banks in
particular could be hit by a lack of issuance
if volatility remains high, according to a
CreditSights report.
Even so, some investors continue to show
a liking for the sector, as evidenced by
Truist’s US$9.5bn order book on its
US$4.25bn four-part bond, which saw
concessions of just 1bp-6bp.
“We still believe the fundamentals are
VERYûATTRACTIVEûINûTHEûlNANCIALûSECTOR ûANDûASû
risk perception moves higher, there could
be opportunities in that sector,” said
Jonathan Duensing, director of investment-
grade credit at Amundi Pioneer.TRUIST BRINGS US$4.25bn DEBUT AS A
NEWLY MERGED ENTITYTRUIST hit the US high-grade market last
Wednesday with a US$4.25bn four-part
bond, marking a debut for the newly named
bank formed by the merger of BB&T and
SunTrust.
The Single A rated credit was seen as an
OBVIOUSûCHOICEûTOûBEûONEûOFûTHEûlRSTû
borrowers to garner bond funding after the
primary market reopened following a week-
long drought.
“Once the market reopened, a very high-
quality, senior, A rated regional bank
bringing a bond seems par for the course,”
said Dan Bruzzo, a bond analyst at Amherst
Pierpont.
And while sinking rates in the US will act
as a headwind for bank revenues, the fallout
from the coronavirus is seen impacting
Truist and other regional banks less than
others in the sector.
h#REDITûEXPOSUREûISûWELLûDIVERSIlEDûANDû
they are less exposed to global markets, sobanks like Truist, aside from the rate
impact, are a defensive play,” said Peter
Simon, a senior analyst for North American
banks and brokers at CreditSights.
Indeed, in an up day in the markets,
Truist enjoyed decent price progression,
TIGHTENINGûBP
BPûFROMûSTARTûTOûlNISH û
before launching a deal comprising a mix of
senior and subordinated bonds.
The bank’s operating company priced two
lXED
RATEûSENIORûUNSECUREDûTRANCHESû
ûAû
53BNûTHREE
YEARûANDûAû53BNûlVE
year - at Treasuries plus 58bp and 78bp,
respectively.
It has also came with a three-year
SUBORDINATEDûmOATERûATûBPûOVERû3/&2ûANDû
a 10-year subordinated bond at Treasuries
plus 123bp, 25bp inside initial price
thoughts.
“It is not surprising the 10-year sub debt
tranche has come in quite a bit from initial
price thoughts,” said Simon.SUB FIRST
4HEû
YEARûSUBûTRANCHEû
ûTHISûYEARSûlRSTû
from a regional bank - will top up the bank’s
Tier 2 capital, which as of last year stood at
US$6.8bn, or 1.8% of risk weighted assets,
below the optimal 2%, according to
CreditSights.
%VENûSO ûITûPROBABLYûBENElTEDûFROMû
expected rarity value given the diminishing
need to raise Tier 2 capital in the sector
overall.
“We haven’t seen a lot of subordinated
issuance from the sector in the last few
years and we are not expecting it to pick up
substantially for another several years,” said
Simon.
Final pricing on the 10-year sub debt came
with a slight pick-up to its legacy subordinated
3.875% 2029s (A3/BBB+), which were trading at
a G-spread of around 115bp, and KeyBank’s
3.90% 2029s (Baa1/BBB+), which had been
changing hands at G-spread of around 123bp,
according to MarketAxess data.
"UTûTHEûlVE
YEARûlXED
RATEûTRANCHEûCAMEû
tight to the bank’s legacy 4% 2025 (A3/A-)
and KeyBank’s 3.30% 2025 (A3/A-), which
were trading at respective G-spreads of 88bp
and 85bp.
The bank also tried its hand at a
SUBORDINATEDûmOATERûLINKEDûTOûTHEûNEWû,IBORû
replacement benchmark, SOFR.
This comes at a time mid-sized banks are
pushing back against the Federal Reserve’s
ONE
SIZE
lTS
ALLûSOLUTIONûTOûTHEûTRANSITIONû
away from Libor and asking for regulatory
support for an alternative to SOFR.
At 73bp over SOFR, some analysts
reckoned the deal was coming at a similar
level to a Libor trade with new fallback
language.
“As long as there is fall-back language for
the transition from Libor, we are not seeingInternational Financing Review March 7 2020 33BONDS FIG6 IFR Bonds 2323 p 25 - 53 .indd 33 06 / 03 / 2020 19 : 18 : 07