As noted earlier, the post-debate market relief rally has given way to concerns over banking woes, with stocks turning lower in Europe as focus returns to Deutsche Bank and Italy’s constitutional referendum, now scheduled for December 4. More troubling is the overnight news that two German issuers - Nord LB and Lufthansa - followed quickly by Korean Air Lines, have pulled their bond deals prompting commentators to suggest that 'uncertainty on the credit front appears to be weighing" on some and may be raising concerns about the German economy.
As IFR reported overnight, concerns around potential contagion from the German banking sector forced Norddeutsche Landesbank to shelve a 7 year senior unserued bond on Tuesday "after the issuer struggled to find enough demand to cover the seven-year trade." The German lender, rated Baa1/NR/A-, started marketing the benchmark trade on Monday at 90bp area over mid-swaps via leads BNP Paribas, DZ Bank, NordLB, Santander (B&D) and UniCredit. However, Nord LB's ambitions were cut short as renewed concerns around Deutsche Bank's capital position swirled around the market, sending spreads wider.
"It didn't get the response that you would want. There is too much noise around the German banking sector," a lead manager said. Deutsche Bank's bonds shot wider despite the bank insisting it can weather a potential U$14Bn fine without raising extra capital and that it had not sought a government bailout. A 750m 4.5% 2026 Tier 2 bond has widened 24bp since Monday's open to swaps plus 509bp.
But Deutsche Bank is not the only culprit. The German Landesbank sector, of which NordLB is a part, has also come under intense scrutiny this year given the damaging scale of its shipping loan exposures. Reuters reported earlier this month that the German state-controlled lender had agreed to take full control of its loss-making Bremer Landesbank unit, which is suffering from a weak shipping market that is chipping away at its capital.
Moody's downgraded NordLB earlier this month following that announcement after both entities reported losses in the first half. NordLB's senior rating was lowered to Baa1 (negative) from A3. It is A- (stable) by Fitch. NordLB's 750m January 2021s, issued in January at swaps plus 77bp on books of just under 800m, were bid around 41bp on September 6 but are now around 67bp, according to Tradeweb prices.
And while fundamentals have largely not mattered in recent months as investors felt backstopped by central banks, such concerns returns with a vengeance on Monday.
NordLB is the second deal to be pulled this week in the European bond market. Lufthansa mothballed a proposed €500MM no-grow seven-year on Monday after refusing to compromise on pricing, stating that pricing was not "achievable in the current market."
In a statement released on Tuesday NordLB thanked investors for their interest in the transaction, but said it had "decided not to proceed with the transaction at this point. The company is looking forward to re-engaging with investors again in the future."
And then, most recently, completing the trifecta of pulled deals was Korean Air Lines which pulled a US-denominated 30NC3 deal. The carrier decided not to proceed with transaction in current market and will "review future issuance windows", according to Bloomberg.
The trend of pulled deals is, needless to say, disturbing since that has been the primary pathway the central banks have focused on in recent months: from the ECB's March announcement of corporate bond buying, to the BOE following suit over the summer. With the bulk of proceeds from new debt issuance continuing to fund stock dividends and buyback, should the "contagion" spread to more issuers, it is probable that equities will be the first asset class to suffer should the bond issuance window indeed slam shut.