In what the FT (worryingly) suggests could become a trend among struggling banks, Icelandic bank Kaupthing raised €1.1bn ($1.7bn) through privately placed bonds on Tuesday- mainly, it claimed, because it could.
The bank has had a very rough ride in the credit markets of late. Kaupthing (which has the deal plastered all over its website) said it wanted to prove it could still raise funds, despite being locked out of public bond markets by its skyrocketing credit derivative spreads.
CDS for Kaupthing were trading at around 706bp on Monday.
As Lex noted on January 31, just after Kaupthing pulled its bid for NIBC, the Dutch brokerage, most European banks with similar credit ratings had credit default swap prices of around 60bp. Indeed, in July 2007, before the credit crisis broke, spreads on Kaupthing CDS were around just 30bp.
Tapping the public bond markets has become prohibitively expensive for Kaupthing because, by convention, new bonds are issued at a level above CDS.
Two German banks, a UK asset manager and a US asset manager bought Kaupthing’s privately placed bonds after a month of negotiations, said Gudni Adalsteinsson, chief treasurer at Kaupthing, noting that the bank also received a €195m loan from a “European bank”, without saying which one. “We don’t usually announce transactions like this but … this is an important message to go out to the market, that the CDS markets are not the beginning and the end of all,” he said.
Kaupthing’s CDS spreads receded by about 70bp on Tuesday amid news of the placement.
The question, however, is what kind of interest Kaupthing is paying on the bonds – something the bank remains coy about, although it insists the rate is “significantly below” its CDS levels, and below the level at which it normally lends to its corporate clients.
“It remains very expensive funding, and this situation can’t go on for ever,” Olivia Frieser, credit analyst at BNP Paribas, told the FT.
Adalsteinsson, meanwhile, denied that Kaupthing raised the funds through desperation, stressing that the bank already had enough liquidity to last 360 days: “We thought if you can get money now, you should … because you never know when the market’s going to be open; when this long winter’s going to end,” he said, adding that the shift to privately negotiated deals is bound to continue – and not just at Kaupthing.
Lex, however, said at the end of January that Iceland’s systemic frailties “should not be exaggerated”.
All the main banks run a surplus of foreign-currency assets over liabilities, and the size of this relative to their capital is governed by central bank restrictions. Fourth-quarter results at the big three banks showed healthy net interest income, while capital ratios look solid. Meanwhile, the oft-cited comparison of Iceland’s population — a lowly 300,000 — with the combined €118bn balance sheet of its three biggest banks is a distraction. No one draws a similar parallel between, say, Edinburgh and Royal Bank of Scotland.
The question is whether markets will revert to normality before the banks run out of cash; Kaupthing and Landsbanki say they have liquidity on hand to last at least another year. Until then, hunkering down while chasing deposits — as they did after the last liquidity wobble in late 2005 — looks the smartest option.