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REFILE-Three more blue chips pile into ebullient sterling market

Mon, 8th Aug 2016 14:29

(Refiles to correct typo)

* Sterling market wide open for corporates, financials

* Strong performance entices borrowers

* Long-end revival possible

By Helene Durand

LONDON, Aug 8 (IFR) - HSBC, BNP Paribas and BMW are taking full advantage of positive momentum spurred by the Bank of England's announcement last week of up to £10bn of corporate bond buys, and will price heavily oversubscribed trades later on Monday.

The three opened books on deals ranging from six to 12-years, following on from issues last week by Barclays and Vodafone for a total £2.25bn on combined orders of over £5.75bn.

The market had already begun recovering ahead of the BoE's surprise announcement last Thursday - corporates and financials have sold just over £8.75bn of bonds since the Brexit vote - but the pace of issuance should now pick up even further.

"QE is a real game-changer and investors simply can't run the risk of running underweights in sterling credit," said Marco Baldini, head of European bond syndicate at Barclays.

"Issuance for most of the year had been at historical lows but it doesn't take a lot to change that and that's what we're seeing right now."

Such is the appeal of the market right now that issuers like HSBC and BNP Paribas are revisiting a currency they have not tapped in years.

HSBC's 12-year senior is its first major sterling holdco bond since 2009. Books rocketed to over £1.9bn, with guidance then set at Gilts plus 185bp (+/-2bp) from earlier IPTs of plus 195bp area.

The lack of sterling issuance is at odds with its US dollar form, where the bank has raised US$16.75bn in 2016, and euro borrowing this year of 3.25bn.

Meanwhile BNP Paribas has not sold any public benchmark sterling bonds since 2012, according to Tradeweb.

"BNP Paribas is taking advantage of the strong conditions in sterling at the moment," said a banker on the self-led six-year benchmark that at the time was being marketed at 110bp area over Gilts.

"There's been a significant rally and Gilt yields are anything between 10bp and 15bp lower. It's cheaper funding than euros as the Gilt spread works out at high 30s versus mid-swaps."

IFR calculations had the IPTs equivalent to euro swaps plus 42bp, although guidance was subsequently released much tighter at Gilts plus 95bp-100bp on orders of over £1.25bn.

Final terms later came at the tight end for a £500m deal.

Demand was also strong for the day's only corporate trade, a six-year benchmark from BMW that had attracted over £1bn of interest at the last update.

Guidance then was set at Gilts plus 70bp area (+/-3bp, wpir) after plus 75bp IPTs via lead HSBC and Morgan Stanley.

"Right now, funding levels in sterling are pretty compelling for issuers that swap the funds back to euros or US dollars, and even for those that keep the funds in sterling," said Baldini.

While the BoE is yet to release its list of eligible issuers for the new corporate purchase scheme, Bank of America Merrill Lynch credit strategists think BMW will be eligible. This puts the German carmaker in a bracket the BAML strategists dub "CSPP squared", as it is also eligible for the ECB's CSPP.

"We think the two policies will end up reinforcing each other for this subset - and thus be very bullish for their spreads," the strategists said in a note last week.


Expectations are that the post-BoE announcement rally has some time to run with analysts at JP Morgan, for example, estimating that spreads could tighten by 40bp-150bp over the next few weeks.

Some of this has already materialised. The sterling non-financials iBoxx index is 29bp tighter than the day before the BoE announcement at just over 168bp, while the financials index is 17bp tighter.

"We can look to Europe's recent experience for a sense of where UK IG credit may be heading," said Andreas Michalitsianos, fund manager, JPM Sterling Corporate Bond Fund, in a note.

"The ECB's staggeringly ambitious corporate bond purchasing programme has had a major influence, with spreads of eligible issuers tightening by approximately 35% since the announcement of the program in March...This major incremental, non-economic buyer is a bullish signal underpinning corporate bond markets."


The BoE's intervention could also mean a return of the long-end's heyday, according to Matthew Bailey, Europe credit research at JP Morgan.

The long end of the sterling curve has struggled over the past two years due to changes in pension legislation structurally lowering the demand for duration, he said.

"However, in our view, curve steepening in sterling has now run its course...the global 'search-for-yield' in investment grade fixed income is back, with investors buying anything with a positive carry. In an environment where spreads are rallying due to central bank buying, we recommend increasing exposure to long-dated sterling credit."

Some long-end deals have already performed phenomenally well. Electricite de France £1.3bn 2114s are now up 22 points at a 166 cash price since the BoE announced its programme. (Reporting by Helene Durand, Additional reporting by Robert Smith, Editing by Julian Baker and Sudip Roy)

(c) Copyright Thomson Reuters 2016. Click For Restrictions -

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