Rabobank bolsters capital as bail-ins loom
LONDON, Sept 5 (IFR) - Dutch lender Rabobank made a successful return to the subordinated market on Tuesday where it raised EUR1.65bn equivalent of Tier 2 debt as it seeks to protect its senior debt from looming bail-in regulations.
The issuer priced a dual-tranche EUR1bn and GBP500m issue that attracted over EUR3.6bn of demand across both tranches and priced at the tight end of guidance.
"Rabobank stated in its half-year results that it was intending to increase capitalisation levels in order to minimise the impact of the upcoming Crisis Management Directive and these deals were in line with this new strategy," a funding official at the bank said.
Rabobank has set itself a target of 14% Core Tier 1, 17.5% Total Tier 1 and will seek to add Tier 2 on top of that in order to mitigate the risk of bail-in for senior debt holders once the Crisis Management Directive will be effective.
The introduction of the Crisis Management Directive (CMD) from 2015 will give regulators greater powers to impose losses on bondholders. One of the key elements of the Directive is the introduction of the bail-in tool, although that won't have to be implemented until 2018.
"For some time now, banks have been focusing on increasing their Core Tier 1, because of what regulators and the market have asked them to do," said a head of FIG syndicate. "However, more and more issuers are recognising that in order to achieve the best cost of funding in senior, they need to have an additional buffer of debt underneath senior debtholders."
Rabobank is a prolific user of the wholesale funding markets, which explains why it would seek to bolster its total capital to protect senior debtholders.
According to its second half results, the bank had just under EUR189.5bn of long-term debt outstanding and just under EUR341bn of customer/corporate deposits. In 2009, 2010 and 2011, it issued more than EUR40bn in the wholesale markets and it had raised EUR23bn this year as of June.
While Rabobank has been a regular feature in the hybrid Tier 1 market over recent years, it had never before done Tier 2 in sterling and only had EUR2bn outstanding in euros.
Rabobank used the dual-tranche approach, mandating Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley and Rabobank for the euro, and HSBC, Morgan Stanley, Nomura and Rabobank for the sterling.
NOT A GIVE-AWAY
It began the process with initial price thoughts of 250bp area over mid-swaps on the 10-year bullet euro, which according to one lead gave a new issue premium of around 25bp. Rabobank's outstanding November 2020 was quoted around 205bp over, to which the leads added 15bp-20bp for the curve and another 25bp for the new issue premium.
"The level was fair and not overly generous which is why we had a EUR2bn book with 235 accounts rather than EUR6bn," the lead said. "The average order size was not very big because investors know there is quite a lot of supply coming, at potentially more attractive levels and they wanted to keep their powder dry."
Final pricing at 245bp over was around 130bp back of where a new Rabobank senior would be expected to come, which was well inside what other issuers have had to pay. The banker estimated the differential between senior and subordinated for a bank like Nordea to be in the region of 200bp.
Meanwhile, Rabobank received a strong response in the sterling market for its Tier 2 sterling debut, which also constituted the first Tier 2 issue from any bank since 2010.
Lead managers went out with initial price thoughts of Gilts plus 310bp for a 15-year bullet, using Rabobank's 2020 deal as a reference point as well as guidance on the new 10-year. They also looked at HSBC's December 2027 that was quoted around Gilts plus 315bp-295bp.
They estimated the new issue premium to be around 10bp at the 310bp guidance which did not deter 150 investors who put in order for GBP1.3bn. Final pricing was at 305bp over Gilts and at GBP500m, this is the second largest bank sterling benchmark this year.
Asset-managers took 70%, insurance/pension 13%, hedge funds 6%, private banks 5%, banks 3% and others 3%. The UK bought 74% of the deal, Switzerland 14%, Germany 4%, Benelux 1%, other Europe 4% and rest of the world 3%.
NO PREMIUM FOR STRUCTURE
The lead managers agreed that Rabobank paid very little, if anything, for including a reference to upcoming resolution regimes which give regulators power to apply haircuts to banks' subordinated debt at the point of non-viability and before governments have to inject capital into an institution in trouble.
The deal features statutory loss absorption language in the Risk Factors - the CMD was introduced in June 2012 - which is cross-referenced in the Terms and Conditions.
This is a new way of acknowledging upcoming resolution regimes. A EUR1bn Tier 2 deal sold by ABN Amro in July this year referred to the CMD in the terms and conditions. Bankers estimate that banks have to pay a bigger premium for this, of around 10bp, even though they agreed that it's purely academic, as if a bank is resolved, all of its Tier 2 debt would be captured.
"Pre-amble article 51 of the CMD says that the point of non-viability should be recognised in the terms so by cross-referencing the loss absorption that is in the risk factors in the terms, we have adhered to these requirements," the official said.
The issuer also stripped out the substitution variation language which was included in earlier European banks' Tier 2 debt this year. Investors were not comfortable with it, and neither was Moody's, who did not want to rate such deals. (Reporting by Helene Durand, Editing by Julian Baker)
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