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Funding levels fire up transatlantic bank issuance

[LONDON] Lured by attractive financing rates in Europe, US banks are crossing the pond to help raise the funds they need to meet future regulatory requirements.

This week alone saw Goldman Sachs, JP Morgan and Citigroup sell a combined 4.8 billion euros. That's almost a fifth of the total 27 billion euros of euro-denominated paper issued by US banks in the whole of 2014, according to IFR data.

Bankers said the healthy bid out of Europe for senior paper has encouraged US banks to consider euro funding, especially since choppy conditions in the dollar market require relatively large new issue premiums to get deals away.

US sentiment was not helped by JP Morgan having to downsize an already-launched transaction last week on what was a volatile day for Treasuries. Other US bank curves have widened since the trade.

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A key factor driving the issuance is the attractive all-in cost of funding. Expectations of quantitative easing have driven down euro spreads, so despite an elevated cost of swapping back into dollars, euro trades still look appealing.

Pricing for JP Morgan's dual-tranche euro deal was 20bp inside dollars for the 10-year fixed portion and 10bp inside for the five-year floater, according to a banker.

Citi's 1.25 billion euro 10-year also priced at a better level than the bank could have achieved in dollars.

Goldman didn't do quite as well, coming more or less flat to its home currency market with 7.5-year fixed and floating issues, according to another banker.

"US banks are getting reasonable terms in Europe, although it varies on the maturities," said a syndicate banker. "For these banks, it doesn't really need to be much more attractive, it just needs to be competitive enough so as soon as levels elsewhere get close to the levels they can achieve domestically, they come to the market."

Both Goldman and JP Morgan added floaters to their fixed tranches during the bookbuilding process, a format which has accounted for around 45 per cent of deals in January.

"It's becoming an important and more strategic market," a syndicate banker said.

Consensus put the new issue concession across the three fixed notes at 15bp-20bp, more than the 7bp-10bp seen on senior deals from European banks this year. Order books of EUR3-5bn suggested this proved popular a popular approach with yield-hungry investors.

It could be that banks were happy to pay up to ensure the deals got safely over the line, but some suggested that investors were demanding additional compensation for the longer maturities.

EYE TO THE FUTURE Others reckon the market may already be feeling the impact of the FSB's total loss-absorbing capital (TLAC) proposal on the cost of holdco paper.

The FSB laid out plans in the autumn that could require the world's systemically important banks, or G-SIBS, to have a safety buffer of TLAC equivalent to at least 16%-20% of their risk-weighted assets from January 2019. Some expect that debt issued at the holding company level could help meet these new requirements.

"After the TLAC numbers came out late last year, investors began to wake up to the fact that there was more downstream risk associated with holdco paper. So they (investors) are charging a premium for that," said one DCM banker.

While uncertainty remains over pricing, TLAC requirements are already having an impact on supply expectations.

To reach the midpoint of the 16-20 per cent suggested range on a static balance sheet basis, the US SIFIs (systemically important financial institutions) would have to issue US$127 billion in net supply, Barclays analysts wrote in a report.

JP Morgan and Wells Fargo are likely to face the most incremental issuance needs at US$52 billion and US$55 billion respectively. It was therefore not surprising to see JP Morgan issue the best part of US$8 billion in the past week.

Laurent Frings, co-head of EMEA credit research at Aberdeen Asset Management, said it makes sense for US banks to issue now while there are still misperceptions or uncertainty among investors in Europe about where US holdco paper should trade.

"Investors are only starting to realise that they have been buying structurally subordinated paper for the last 10 years," he said. "So from a US bank perspective, they want to be quick off the mark before there are more answers on TLAC, which will drive a lot of supply and repricing of paper."

Senior holding company debt remains one of the cheapest forms of capital and will therefore likely account for the majority of this quantum, although additional rules could require a certain proportion of subordinated debt.