Primary fires back to life as ECB supercharges markets

* First European AT1 since mid January

* Demand for Deutsche Telekom (LSE: 0MPH.L - news) reaches 18bn

* Aggressive high-yield structures return

LONDON, March 14 (IFR) - European credit markets roared back to life on Monday, as borrowers capitalised on demand for paper following the European Central Bank's stimulus measures announced last week.

A slew of deals, including the first Additional Tier 1 issue from a European lender since the middle of January from UBS (LSE: 0QNR.L - news) and a three-tranche benchmark for Deutsche Telekom, attracted multi-billion books.

"Investors' response to Deutsche Telekom, which is somewhat a European bellwether, gives us a good sense of what is to come. There is a lot of pipeline that will now unlock," said Jonathan Brown, global co-head of investment-grade syndicate at Barclays (LSE: BARC.L - news) .

Issuers are looking to make the most of the positive sentiment in the market since the ECB announced further stimulus measures last Thursday.

UBS Group (LSE: 0R3T.L - news) launched a US$1.5bn perpetual non-call five-year AT1, drawing more than US$7.8bn of orders by mid-morning.

The risky end of the bank capital market was effectively shut just a month ago, as concern around banks' ability to pay coupons exacerbated thin liquidity in the nascent asset class.

"Pre (Shanghai: 600048.SS - news) -ECB, who would have thought we would have had an AT1 today?" said a senior syndicate banker. "It (Other OTC: ITGL - news) 's extremely encouraging to see that market reopen."

At 6.875%, the pricing level is flat to UBS's last AT1, a US$1.5bn perpetual non-call 10 priced in July last year, alleviating some concerns that the repricing in February would make the market unaffordable for issuers.

"Bank capital is one of the biggest beneficiaries and we have seen bonds rally massively since last week, from senior to Tier 2, insurance subordinated and AT1," said Brown.

BUN FIGHT

The investment-grade corporate market looks to be one of the biggest winners, where news that the ECB is readying bond buys in the sector has given the pipeline a shot in the arm.

"With (Other OTC: WWTH - news) the prospect of the ECB buying, we will have some stability in the market and some of the pent-up supply will get done. Investors will look to primary to source paper, add on more risk and put cash balances to work," said David Riley, head of credit strategy at BlueBay Asset Management.

Deutsche Telekom's 4.5bn three-tranche transaction attracted 18bn of demand - the largest book for a purely euro-denominated corporate deal in recent history, according to a lead bank.

BP and Fluor are already tapping investors, while unrated Outotec Oyj (LSE: 0MGI.L - news) will test the waters for the first euro hybrid of the year after completing a roadshow in the coming days.

"The deal will be driven mainly by domestic demand I suspect, but it could spur more hybrid issuance, although investors will still be very apprehensive so it may take some time," said a banker away from the deal.

Volatility has soured the hybrid market with no issuance printed this year. Last year by this point some 12.8bn of paper had priced.

The renewed strength of demand for vanilla corporate bonds was amply demonstrated on Friday. A 600m deal from French auto part supplier Valeo (LSE: 0NR3.L - news) drew 7bn of orders, the biggest book for a single-tranche corporate issue this year.

Meanwhile, in the European high-yield market Parex is bringing the first dividend recapitalisation deal in months - a controversial practice where a company's owners raise debt to pay themselves a dividend.

LeasePlan's revived 1.55bn LBO deal showed the junk bond market was very much open for business at the end of last week, pricing much tighter than where it was indicated before underwriters pulled it in February.

Emerging markets borrowers are also making their presence felt, with Bulgaria opening books on Monday for a dual-tranche euro benchmark and junk-rated South African paper firm Sappi announcing a euro mandate.

Whether it will last remains to be seen, however, and market participants remain cautious.

"Whether this is a turning point for European credit and risk assets depends on the fundamentals," said BlueBay's Riley.

"The ECB responded as it did because of growth concerns. What was announced was positive for European credit, however we are cautious not to get suckered into the current rally.

"Investors had increased their cash balances and reduced their exposures to market-sensitive instruments because of the sell-off and there is a danger that, as they look to cover their shorts, they get suckered into the rally." (Writing by Robert Smith, Reporting by Laura Benitez, Alice Gledhill, Helene Durand, editing by Julian Baker and Sudip Roy)