In the week following Thanksgiving, a EUR 1 billion seven year 3% sale by Russia was particularly prominent. Roughly half the deal reportedly was sold to investors not linked to Russia. Some market sources viewed the deal as politically timed following the recent naval incident with Ukraine, serving to show Russia's ability to diversify its funding sources and advance its borrowings ahead of potential extension of sanctions.

Away from Russia, this week's main developments include three initiatives to reduce the severe levels of impaired debt carried by European banks using major asset securitisations in 2019.

On 22 November, Greece's central bank, the Bank of Greece, released plans to underpin securitisation of impaired mortgage loans by the transfer of some EUR7.4 billion of tax credits due to Greek banks, and to use these to permit the repackaging of some EUR40 billion of non-performing mortgage assets. Both asset classes would be shifted to an off-balance sheet special purpose vehicle for the planned sale.

In parallel, on 26 November, Greece's Eurobank announced its acquisition of Grivalia Properties, Greece's second largest real estate investment firm, through a share swap. The deal will increase Eurobank's equity base by some EUR900 million, increasing its common equity tier one capital ratio from 11.3% to 13.8%. Canadian insurer Fairfax Financial Holdings will increase its share in Eurobank from 18 to 32.9%: it currently owns 51% of Grivalia. Eurobank CEO Fokion Karavias claimed that the merger would "enable the bank to accelerate the reduction of its non-performing exposures through a large scale securitisation of around Euro7bn" planned for 2019.

Ireland's Permanent TSB announced on 29 November that, like Greek banks, it plans to use securitisation to reduce its exposure to troubled property loans through selling a EUR1.3 billion deal within efforts to reduce impairment and refocus its business towards SME lending. It hopes to trim its NPL loan ratio to below 10% from the 26% recorded at end-2017. Permanent TSB is currently 75% state owned.

The banking sector also has featured heavily within this week's bond deal flow:

• HSBC sold USD2.25 billion of TLAC-eligible debt, including a green tranche within its package. Denmark's Jyske bank also completed a debut Euro-denominated three year senior debt issue that is MREL-eligible.
• Italy's Unicredit also has raised USD3 billion of TLAC-eligible five year senior non-preferred debt. Unusually, it did so by way of a private placement to a single investor (reported by International Financing Review to be Pimco) at 7.83%. Market sources view it to have paid up significantly for the sale, but the private format avoided pushing its borrowings into a cautious primary market for Italian risks.
• Despite having one of the sector's weaker capital ratios under stress in recent EU bank stress testing, Spain's Banco Sabadell sold on 29 November a EUR500 million subordinated Tier 2 deal callable after five years. The deal attracted roughly EUR1 billion in demand from over 70 investors, mainly foreign institutions. The offering, the first subordinated bank deal in Europe since June, was priced at 510 basis points over mid-swaps, equating to a 5.38% yield.

Overall, the various bank sales are risk positive. Unicredit's deal is relatively unusual, and the bank appears to have paid a premium for recent volatility in Italian debt and its own relative lateness in moving to lock in TLAC/MREL eligible funding. The completion of the Sabadell sale and that of a perpetual hybrid deal for Belgian speciality chemicals firm Solvay serve as positive indicators of ongoing risk appetite despite being late within the calendar year.

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Posted 30 November 2018 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence