Foreign banks storm dollar market in search of cheaper funding

By Will Caiger-Smith

NEW YORK, Aug 19 (IFR) - Yankee bank issuance has soared this month as tighter spreads, favourable currency moves and huge demand for higher-yielding US assets has lowered the cost of borrowing in US dollars.

Asian and European banks have raised over US$23bn in August, or almost a quarter of the month's overall high-grade volumes, with names such as Societe Generale (Swiss: 519928.SW - news) , Standard Chartered (HKSE: 2888.HK - news) and Westpac hitting the market most recently.

Yankee FIG volumes this month are also more than double the amount raised in August last year - reflecting the intensity of issuance of late.

A multitude of factors have been behind the rush - but one of them is a favourable cross-currency basis swap that has made the US the go-to market for global financial borrowers.

"The currency basis continues to be persistently negative and therefore attractive to issue in US dollars and swap it back to euros, yen and Aussie dollars," said Peter Aherne, head of North America capital markets, syndicate and new products at Citigroup (NYSE: C - news) .

ING Bank, for example, priced new US$450m three-year and US$600m five-year fixed-rate notes earlier this month, as part of a four-tranche deal, at Treasuries plus 83bp and Treasuries plus 93bp respectively.

The three-year dollar tranche swapped back to euros at mid-swaps plus 16bp, according to a banker away from the deal. This is below a rough fair value of about 24bp over swaps for a new ING three-year in euros, based off outstanding bonds.

Westpac, similarly, priced new US$1.5bn three-year and US$1.5bn five-year fixed-rate notes this month, as part of a five-tranche deal, that swapped back below levels where the bank would fund in the local Aussie dollar bond market.

Australian banks have typically secured their cheapest wholesale funding in the local bond market.

DEEP AND STRONG

Favourable swap levels are not the only motivation for issuers. They are also attracted to the sheer depth and strength of the US dollar market, bankers said.

One London-based FIG banker said gauging pricing levels on a new euro trade was tricky, partly because of the lack of supply in that market.

The US primary, in contrast, has been open all summer and the kinds of new issue concessions required to get deals over the line are much clearer.

Simply put, there is no execution risk in the US dollar market irrespective of size and the tranches on a deal - a distinct advantage to other global debt markets.

Westpac, for example, received orders of US$12bn for its record-breaking US$5bn five-part senior unsecured offering this month - the biggest trade on record for an Aussie lender in any currency.

The bank priced the deal up to 15bp tighter than initial price thoughts for a level that was flat to 6bp in new issue concessions compared with outstanding bonds.

"Issuance has been very well received, with deals well oversubscribed and low new issue concessions, and global borrowers are taking advantage of that," said Aherne.

A tightening in US spreads following an initial bout of volatility when the UK voted to leave the European Union in late June, has also been a swing factor.

As the US market bounced back, it has opened up for all kinds of structures - including Additional Tier 1, senior and subordinated Tier 2 trades.

"Dollar spreads have rallied to the point where, incorporating the cross-currency basis, they now provide an opportunity for issuers to get beneficial funding in the US," said Simon Mayes, head of US FIG syndicate at BNP Paribas (LSE: 0HB5.L - news) .

PICKING UP STEAM

If conditions remain favourable, more Yankees could emerge - especially if the cost of borrowing in the commercial paper market remains elevated.

Foreign banks have been looking to fund themselves via long-dated US dollar bonds as rates in commercial paper - debt typically maturing in nine months or less - have spiked.

Dutch lender Rabobank issued three-year senior and 10-year subordinated bonds on August 2 in US dollars rather than euros because it wanted to add a new point on its curve and take advantage of better long-dated dollar rates.

"Our dollar trade provided us with good arbitrage based on the swaps spread widening but also fulfilled our need for short-dated US dollar debt," Sjaak-Jan Baars, the bank's global head of long term funding, told IFR.

"The cost of printing a three-year was only 4bp wider than a one year, which also made it attractive," he said.

"On a relative basis, if you look at the global bond markets, US dollars is currently the cheapest market to access." (Reporting by Will Caiger-Smith; Additional reporting by Helene Durand and John Weavers; Editing by Shankar Ramakrishnan and Natalie Harrison)