Why European FIs are turning to the sterling market

European financial institutions (FIs) face a growing need to raise funding. Years of liquidity from governments and central banks, initially prompted by the Global Financial Crisis and subsequently the southern European Sovereign Crisis, and the COVID-19 pandemic, have come to an end. As a result, European issuers are seeking alternative funding sources beyond their traditional domestic euro investor base. Many are considering opportunities in the sterling market.

“The sterling market has many characteristics that make it attractive,” explains Tanguy Morel , Head of Debt Capital Markets, Europe & Canada at Lloyds Bank Corporate & Institutional. Notably, the market is sizeable, able to absorb relatively large issues regularly without indigestion, and offers a variety of tenors and structures.

However, perhaps the most important attraction of the sterling market for most borrowers is that it is distinct from the euro market. “With a funding plan of about €26 billion, we need to diversify our investor base, both in terms of products and markets,” says Harff. In 2023, Crédit Agricole SA raised more than half of its unsecured funding needs outside the euro market, with issuance in currencies ranging from US and Singapore dollars to Japanese yen and sterling.

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Avoiding saturation and overreliance

Typically, the objective of sterling issuance is not simply to secure access to sterling funds. Instead, the goal is to “address a wide spectrum of possible investors and prevent over issuing in one particular category or currency,” according to Ruud Jaegers , Head of Long-Term Funding & Capital Issuance at 荷兰銀行 .

“Investors spread risk over different products – we need to do the same on the funding side.”

To this end, issuers may be willing to sacrifice a few basis points when issuing in currencies other than euro in order to achieve diversification. Their rationale is that taking the pressure off the euro market creates scarcity value and avoids potential saturation, which reduces their euro costs. As euro accounts for the largest proportion of overall funding, ultimately this strategy optimises costs across their programme. “It’s a win-win for European FI issuers and sterling investors,” notes Morel.

For Groupe BPCE , the sterling market has some strategic value, given that both its Natixis Corporate and Investment Banking and Investment Managers entities operate in the UK.

“It potentially allows us to cover local funding needs for our global businesses, or finance asset-based projects in renewable energy, aircraft or infrastructure,” explains Francois Courtois , Global Head of Financial Communication, Investor Relations, Rating Agencies & Short-Term Treasury Sales.

Nevertheless, the main value of issuing in sterling is the resilience that results from investor diversification. “It means we are not dependent on one or two countries or currencies should there be a crisis, or a stress in the debt market – as we have seen regularly in recent years,” Courtois adds.

Reaching a new pool of investors

As one of the world’s major financial centres, the UK is home to large global investors that are active across G3 currencies. Groupe BPCE’s Courtois notes, “our first priority is to stay close and connect with our existing investors”. Inevitably, therefore, part of many sterling issues will be allocated to such global investors, helping issuers to achieve their currency and product diversification objectives.

However, the real prize when issuing in sterling is the ability to access an additional pool of potential investors.

Beyond the large global funds based in London, the UK has a large number of sterling-focused mid-sized investors, which are eager to buy new credits.

“At the same time, while domestic investors are undoubtedly critical to European issuers, distribution to sterling investors can ensure that European FIs don’t become hostage to euro accounts,” says Morel at Lloyds Bank Corporate & Institutional.

Accessing such investors can prove challenging. On a tight roadshow calendar, meeting a variety of smaller accounts may not even be possible. “Attending non-roadshow events where we can meet new faces is therefore important to expanding our investor base,” says Harff at Crédit Agricole.

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Choosing the right partner

To reach the sterling-focused mid-tier accounts that are critical to achieving true investor diversification, rather than simply currency or market diversification, it is important to work with a bank that lives and breathes the sterling market.

“Close investor relationships are critical to understanding the implications of market developments and the dynamics that motivate a wide range of investor types and sizes,” explains Morel.

Lloyds Bank Corporate & Institutional opened 2024 with a handful of important transactions that demonstrate the role of the sterling market in achieving diversification for European FIs. Groupe BPCE sold a ￡450 million long-six year Senior Preferred that generated strong demand. While UK accounts were the mainstay of the deal, a significant number of Asian accounts were also allocated bonds, highlighting the broader investor diversification benefits of sterling issuance.

Just a few days later, Lloyds Corporate & Institutional acted as Joint Bookrunner on a ￡600 million five-year non-call four Senior Non-Preferred transaction for Crédit Agricole. Strong demand and minimal price sensitivity allowed the issue size to exceed the original aspiration. Crucially, on top of the diversification benefits achieved by the new issue, pricing was flat to where an equivalent euro transaction would have printed at that time.