USD MTNs: BNPP 20y ZC; Steepeners; Formosa outlook

BNPP 20y ZC; SocGen and Citi steepeners

Zero-coupon callables (non-Formosa) saw a modest trio of new notes in the past week, led by a $50m 20y ZC NC7 by BNP Paribas with an IRR of 5.96%. In addition, short dated ZCs included a UBS a $10m 10y NC1 with an estimated IRR 5.45% and a Goldman Sachs $10m 5y NC1 with an IRR of 6.26%.

In CMS linked notes, Societe Generale launched a 4y NC2 CMS steepener that pays 14% for the first year, then pays 7*(CMS2y/10y), floored at zero while Citigroup launched a 12y NC1 CMS steepener that pays a given coupon for the first year, then pays 20*(CMS5y/30y), floored at zero.

BNP Paribas: Formosa market shifting to fewer callables, less duration

The drop in demand from Taiwanese life insurers for foreign bonds is set to extend further, according to analysts at BNP Paribas.

The bank published an interesting, in-depth look at the insurance sector recently. It finds that although the fall in Taiwanese demand for duration kicked off as USD rates rose – the last long-dated, zero coupon callable Formosa printed back in May 2023 and there have only been about four fixed rate deals over 20y in 2023 – structural, regulatory shifts in the market will combine with higher interest rates to transform Formosa issuance, as the bank explains:  

”After Taiwanese life insurers faced a challenging market in late 2022 due to the high global rates environment, their foreign asset expansion slowed down, which we think will continue."

 

“Lifers are now likely to offer more policies that can ease asset-liability mismatches by passing on the mark-to-market valuation profit or loss to policyholders, such as health policies or investment-linked policies."

 

“We think lifers will rely on bond ETFs to reduce FX hedging needs but will probably stay under-hedged overall to avoid punitive carry until H2 2024."

 

“Lifers’ LHS hedging flow is likely to slow as Taiwan’s current account recycling shifts from lifers to retail investors and banks, which have less hedging demand. The upcoming ICS 2.0 implementation is likely to result in structural changes in the Formosa bond market, and in lifers’ investment and hedging practices too.”

BNPP expands on the changes it expects to see in the Formosa market, which can be summarized as fewer callables and less duration:

“The majority of Formosa bonds are currently callable bonds. But we expect Formosa bond players to issue more cash bonds to meet lifers’ demand in the future."

 

“The reason is that the callable bonds that lifers held (mostly with non-call period >5 years) will hardly be classified as 'qualified capital resources' under the stricter ICS regulation (IAIS, Chapter 6). This is likely to heavily constrain lifers’ incentive to invest in callable bonds. To minimise the impact on the market, we expect a transitional provision in T-ICS to provide incentive for lifers to hold their current position on callable bonds until maturity or being called."

 

“Moreover, with the gradual transformation of insurance policy sales, the Formosa bond market won’t regain its past glory, in our view…As flows shift from lifers to banks (and retail investors), we believe more Formosa bonds with tenors of 5–15y will be issued.”

Recent structured note activity

Zero-coupon callables and Formosas:

• BNP Paribas sold a $50m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable every five years starting Sep 2030. Self-led. Estimated IRR 5.96%. Announced Sep 1.

   

• UBS sold a $10m 10y NC1 zero coupon callable (non-Formosa). The EMTN matures Sep 2033 and is callable every year starting Sep 2024. Self-led. Estimated IRR 5.45%. Announced Aug 30.

   

• Goldman Sachs sold a $10m 5y NC1 zero coupon callable (non-Formosa). The EMTN matures Sep 2028 and is callable every year starting Sep 2024. Lead N/A. Estimated IRR 6.26%. Announced Aug 30.

CMS steepeners:

• Societe Generale is working on a self-led CMS steepener maturing Sep 2027 NC2 that pays 14% for the first year, then pays 7*(CMS2y/10y), floored at zero. EMTN.  

   

• Citigroup is working on a self-led CMS steepener maturing Oct 2035 NC1 that pays a given coupon for the first year, then pays 20*(CMS5y/30y), floored at zero. EMTN.

Fixed, floating and step-up callables:

• Bank of Montreal is working on a self-led fixed callable maturing Sep 2033 NC2 that pays 5.85%. Domestic MTN.

   

• Barclays is working on a self-led fixed callable maturing Sep 2027 NC3 that pays 5.68%. EMTN.

   

  Barclays is working on a self-led fixed callable maturing Sep 2028 NC2 that pays 6%. EMTN.

   

• BNP Paribas is working on a self-led floating callable maturing Jul 2028 NC3 that pays O/N SOFR +282bps. EMTN. Credit linked to ArcelorMittal.

   

• Citigroup is working on a self-led fixed callable maturing Dec 2030 NC6 that pays 5.25%. Domestic MTN.

   

  Citigroup is working on a self-led fixed callable maturing Sep 2028 NC1 that pays 5.7%. EMTN.

   

• Credit Agricole is working on a self-led fixed callable maturing Sep 2026 NC2 that pays 5.7%. EMTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Sep 2038 NC3 that pays 6.05%. Domestic MTN.

   

  Goldman Sachs is working on a self-led fixed callable maturing Sep 2030 NC2 that pays 6.2%. Domestic MTN.

   

  Goldman Sachs is working on a self-led fixed callable maturing Sep 2028 NC1 that pays 6.15%. Domestic MTN.

   

  Goldman Sachs is working on a self-led fixed callable maturing Sep 2028 NC2 that pays 6%. Domestic MTN.

   

  Goldman Sachs is working on a self-led fixed callable maturing Sep 2033 NC2 that pays 6.05%. Domestic MTN.

   

• HSBC is working on a self-led step-up callable maturing Mar 2025 NC1 that pays 4.6% to Mar 2024, 4.65% to Sep 2024 and 4.7% thereafter. Eurodollar.

   

• JP Morgan is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 4.2%. EMTN.

   

  JP Morgan is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 4.3%. EMTN.

   

  JP Morgan is working on a self-led $20m fixed callable maturing Sep 2024 NC6m that pays 5.45%. EMTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Sep 2028 NC3 that pays 5.3%. Domestic MTN.

   

  Morgan Stanley is working on a self-led fixed callable maturing Sep 2031 NC4 that pays 5.4%. Domestic MTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Sep 2024 NC9m that pays 5.7%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 6%. GMTN.

   

• UBS is working on a self-led fixed callable maturing Sep 2025 NC1 that pays 5.42%. EMTN.

   

  UBS is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 5.4%. EMTN.

   

  UBS is working on a self-led fixed callable maturing Sep 2025 NC6m that pays 5.38%. EMTN.

   

• Wells Fargo is working on a self-led $10m fixed callable maturing Sep 2033 NC3 that pays 5.93%. EMTN.  

   

  Wells Fargo is working on a self-led fixed callable maturing Sep 2027 NC6m that pays 5.85%. Domestic MTN.

   

  Wells Fargo is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 5.7%. Domestic MTN.

Extendibles:

• CIBC is working on a self-led USD extendible with initial maturity Sep 2027 and then extendible to Sep 2028 that pays 5.7%. Domestic MTN.