Piraeus Bank's comeback to the public bond market – the first from a Greek bank in over four years – has fueled hopes that its lenders are on the road to recovery, but capital demands are looming as the next big challenge.
The 5 percent coupon, 5.125 percent yield, six times subscribed order book and near 40bp secondary spread performance on the 500 million euro senior unsecured deal mark a watershed moment for Greek lenders that once saw their paper trading around the 20 percent mark.
Greece is the final frontier in the eurozone crisis recovery, with its banks having been resolutely locked out of the wholesale markets. Irish and Portuguese banks have made giant strides over the past year, issuing covered bonds and senior debt, as well as hybrid capital.
However, a recent health check to see whether last summer's 28 billion euro recapitalization of the four top banks had left them with enough cash to withstand rising loan losses exposed gaping capital holes that need to be filled.
National Bank, the country's largest bank by assets, has a capital need of 2.18 billion euros, while No.3 lender Eurobank's shortfall is 2.95 billion euros. Piraeus and Alpha Bank, on the other hand, have smaller capital deficits of 425 million euros and 262 million euros, respectively, according to Reuters.
"[The senior deal] is a great result for Piraeus but the real test for country's banks will be their ability to raise capital and pay back government participation capital," said Eva Olsson, research analyst for financials at Mitsubishi UFJ Securities.
"A capital increase will encourage secondary performance in this deal and prompt other banks like Alpha Bank and NBG to do follow-up transactions."
Investors should get their money back after a relatively short three years on the Piraeus senior debt offering, although they are exposed to the threat of bail-in from 2016 onwards, when the importance of banks' capital cushions is even greater.
No bank as lowly rated as Piraeus – at just Caa1/CCC/B- – has raised senior debt before but other Greek lenders, such as Alpha and NBG, which have similar deeply sub-investment-grade ratings, now have an important pricing benchmark.
"Piraeus has provided a great platform for any other Greek entity to borrow," said Derek Mills, head of financial institutions syndicate at Deutsche Bank.
"Investors are now a lot less concerned with ratings than they used to be. For instance, hedge funds and high-yield funds are ratings agnostic."
The deal offers further proof, if any was needed, of investors' need for yield. It also went against the typical convention of sovereigns establishing benchmarks off which domestic institutions can issue.
Lead managers BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs and HSBC relied heavily on short-term leveraged investors and hedge funds, which took the greatest portion of the paper, to ensure the success of the deal.
Banks from Portugal, Ireland and Spain have all had to lean on the support of hedge funds to enable them to return to the wholesale funding markets and sell some of their riskiest bonds.
But real money investors with longer term horizons became more involved in follow-up transactions from Portugal's Banco Espirito Santo and Bank of Ireland, for instance.
And now that Greek banks have undergone an extensive health check based on BlackRock's loan loss projections, these investors may take a more positive view on follow-up transactions.
"The hunt for yield, the possibility of a capital-raise in the future and the results of the BlackRock survey encouraged investors to get involved in this deal," said Olsson.
"But what Greek banks really need is for the economy to recover so they can restore healthy lending practices." [Reuters]