After years of bad press, banks have become the safe play in the bond market while corporates are the pariahs, a role reversal underscored this week as investors snapped up about $14 billion of bank bonds while Apple came under shareholder attack.
Carl Icahn, having seen David Einhorn's agitation result in Apple issuing a $17 billion bond in April to pay for part of a $100 billion shareholder capital return program, said he had increased his stake in the company, and repeated calls for the tech giant to make an additional $150 billion worth of share buybacks.
In a letter to Apple CEO Tim Cook, Icahn said that "while the board's actions to date ... may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion" of earnings before interest and taxes, based on Wall Street estimates.
On top of Verizon dumping its single-A rating to issue a record $49 billion of bonds to pay for a $130 billion acquisition of Verizon Wireless, that shows event risk is rising in high quality industrials in the bond markets.
"I think that financials are now the safest sector in the investment-grade market," said David Knutson, a senior strategist at Legal & General Investment Management Americas.
"Banks have gone from being the risky, unpredictable tape bombs every day to plays where you should see continuing spread tightening in the future as they keep improving their balance sheet," he said.
"The industrial sector on the other hand is riddled with companies struggling to increase shareholder returns and are leveraging up for acquisitions and share buybacks to do that."
Those views help explain why syndicates have been reporting much greater interest from a broader swath of regional U.S. funds for bank bonds, now that they are beginning to notice banks' improving fundamentals.
Asian sovereign wealth funds and central banks in particular have been pushing for bigger allocations in bank deals.
"We have definitely seen greater investor participation out of Asia and more generally in the U.S. in the last six months and especially in recent weeks," said Dan Mead, head of Financial Institutions Group syndicate at Bank of America Merrill Lynch.
Unthinkable just a few years ago, banks now look like the prudent safe play. For the first time since 2007, bank spreads are now trading through benchmark indices and industrials.
"This is a significant milestone for the banks," said Hans Mikkelsen, credit strategist at Bank of America.
"Banks used to trade well inside the index pre-crisis. It's taken them years to get back to this point."
In the past week the bank sub-index of the Barclays investment-grade corporate benchmark index was trading at 130 basis points, tighter than the main index itself (133bp) and industrials (135bp).
Bank spreads have tightened about 17 basis points since the beginning of the year, while industrials are 8 basis points worse than where they were in January.
Banks on both sides of the Atlantic have wasted no time making use of their newfound safe-haven status.
Citigroup, Wells Fargo, BB&T, PNC Bank and SunTrust were among the banks tapping the market in the past week, issuing everything from senior unsecured bonds to rarely seen subordinated 30-year notes and perpetual preferred Tier 1 capital.
BB&T issued the first benchmark-sized callable floating rate note by a bank, a $650 million two-year non-call one, a deal designed for a new regulatory environment in which banks are charged levies by regulators if they are considered to have too much debt coming due within a year.
BFCM debuted in the senior unsecured Yankee market with a $1.75 billion two-part offering, while ABN Amro issued $2.5 billion of fixed-rate bonds.
And there's no let-up in sight: syndicate managers say some $7 billion more in FIG issuance is in the pipeline for the next two weeks.
U.S. banks are expected to issue more Tier 1 and Tier 2 capital and European banks are cranking up issuance of Tier 1 non-common or so-called "Alternative Tier 1" securities and subordinated Tier 2 bonds to meet stricter capital adequacy regulations.
And fund managers say bank spreads still have room to tighten.
"Bank spreads have been a lot tighter historically and one of the reasons they will go tighter is because they don't need to issue all that much anymore," said Ashish Shah, head of global credit investment at AllianceBernstein.
"Outstanding bank debt has been shrinking at over $100 billion a year in the last four years."
Shah, Knutson and other large institutional investors who were early to the U.S. bank improvement trade are now interested in higher yielding European bank debt, especially subordinated offerings.
"I think the real sweet spot has become the European banking system because that's where the focus has been of late, on balance sheet improvement," said Shah.
"For that reason I think the opportunity lies further down the capital structure, in bank subordinated paper rather than senior unsecured securities."
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