National Bank of Greece is preparing to price a senior unsecured bond at a lower yield than its sovereign, in a sign that the «doom-loop» between sovereigns and their banks might finally be broken.
The financial crisis exposed the extent to which banks and sovereigns were interlinked and how they dragged each other down in difficult times. However, regulators have been trying to ease this link and NBG could offer the first sign that this is finally happening. «The banking union is trying to break the link between the sovereign and the banks so credits are analysed on their own merits rather than those of their sovereign,» said Georg Grodzki, head of credit research at L&G.
"The new institutional framework for banks in the eurozone could make a strong case for banks pricing through their sovereigns in the future."
The EUR750m five-year senior unsecured bond for NBG is expected to be launched on Thursday and could price with around a low 4% yield. Greece's EUR3bn five-year bond that priced at 4.95% in the second week of April is now bid at 4.76%. Banks typically price unsecured debt at a concession to their underlying sovereign due to the perceived safety of government paper. For example, the French sovereign trades around 50bp through its banks at the five-year point of the curve.
However, the fact that Greece defaulted on its debts as recently as 2012 is expected to encourage investors to accept a lower yield if they believe NBG is on track for a strong recovery.
"NBG will price through the Greek sovereign,» said a syndicate banker. «Intuitively, it doesn't make a lot of sense, but the capped size and the further potential for tightening in Greece and Greek credits will encourage people to come in. The main reason people bought Piraeus was because they expected it to perform."
Piraeus Bank, like NBG rated Caa1/CCC/B-, last month sold the first senior unsecured bond from the country since 2009, but kept to the relative safety of the three-year part of the curve.
The EUR500m issue attracted over EUR3bn of demand and came at a yield of 5.125%. It is now bid at 3.51%, according to Tradeweb on Wednesday. NBG is also set to become the fourth Greek lender to tap the international markets through a share offering. It plans to raise up to EUR2.5bn to boost its core capital, according to Reuters.
NBG must plug a EUR2.18bn capital hole, a central bank stress test revealed in March.
"The equity-raises of Greek banks are to be taken as a positive as bondholders will benefit from a larger risk buffer,» said Grodzki.
"They also highlight the much improved market sentiment, as many investors are giving the Greek recovery story the benefit of the doubt, no matter how fragile it still is."