Bank bonds plummet as UK walks away from EU

By Alice Gledhill

LONDON, June 24 (IFR) - UK bank bonds were hit hard insecondary markets on Friday following the nation's vote to leavethe European Union, storing up a period of huge uncertainty forthe sector.

UK Additional Tier 1 bonds, the riskiest type of bank debt,fell by up to 8 points while peripheral banks' Additional Tier 1prices lost up to 10 points.

Tier 2 and senior debt has also sold off heavily, with Tier2 debt up to 100bp wider while a Barclays 1.5bn senior bond dueMarch 2021 widened around 75bp to swaps plus 218bp, thoughspreads have recovered since.

The moves were mirrored in broader financial indices. TheiTraxx FinSub index was 67.75bp wider at 261.4bp by 10.30am onFriday while the FinSen index was 28.7bp wider at 121.8bp.

"Clearly the story is one of surprise, of risk-off. Iexpected significant moves on the day. They will obviouslysettle down, but there is a large level of uncertainty for theUK, Europe and broader markets overall," said one commentator.

"We'd expect to see further pressure for risk premia for UKbanks, and any banks that have a relation to the periphery."

The result came as a shock to many in the market whichappeared to price in a "Remain" outcome in recent days. Theprimary market for financial institutions is expected to beshut, though for how long is unclear.

"I expect it to be a period of consolidation, but issuerswill adjust eventually just like they did in 2008/2009 and2011/2012. We've been through crisis before and people willadapt," said a syndicate banker.

"I suspect any reopening will be oriented towards the US. There will be a higher degree of receptivity there. We needclarity and for the markets to find a clearing level, which willtake more than a week."

BACKSTOP

The market, however, appeared sanguine towards UK bankliquidity. UK banks made limited use of additional liquidityfrom the Bank of England last week and have issued around46bn-equivalent in the sterling, euro and dollar marketsyear-to-date, according to IFR data

"There was a lot of uncertainty around Brexit and you alwaysplan for the worst. Banks have done a lot of good business inthe first half of the year, and got themselves quite advanced,"said a FIG DCM banker.

The Bank of England's governor Mark Carney said on Fridaythat the central bank was ready to provide £250bn of additionalfunds to support financial markets. It will consider whether totake additional policy responses in the coming weeks.

It is now key that policy makers keep the currency undercontrol, said one investor.

"The Bank of England statement helped to stabilise bankshares, though clearly there are fears about lower growth andthe impact on asset quality. Funding spreads for banks will goup, but liquidity is there and cost will feed into P&Ls onlygradually." (Reporting by Alice Gledhill, editing by Sudip Roy, HeleneDurand)