Regulatory fog weighs on Tier 1 mkt, Tier 2 builds momentum

Thu Nov 22, 2012 11:31am EST

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By Natalie Harrison

LONDON, Nov 22 (IFR) - European banks will probably refrain from issuing new Tier 1 debt until there is more regulatory clarity on the securities, but Tier 2 volumes may accelerate due to redemption pressures, bankers said at IFR's 2012 Bank Capital Conference on Thursday.

Tier 2 volumes have already increased in the second half of this year following a surge in risk appetite on the back of ECB President Mario Draghi's promise to hold down the borrowing costs of battered eurozone sovereigns.

Issuance prospects for 2013 will largely be dictated by banks' capital needs, but bankers said redemptions amounting to around EUR50bn will also be a factor.

Tier 1 flows, in comparison, will remain limited, bankers and issuers agreed.

"Few people are prepared to press the button, but it will come at a later stage," said Olivier de Lamarliere, FIG DCM at Bank of America Merrill Lynch.

Alain Stangroome, head of capital planning at HSBC, said the problem that issuers faced was the risk of issuing securities that carried uncertainties, which ultimately was not good for their investors.

Stangroome said that Barclays' CoCo was an interesting structure, but not one that HSBC was enamoured with. He was also sceptical about Tier 1 instruments.

"We're likely to see more Tier 2, but Additional Tier 1 is tough in Europe. We may have to live with it in the future, but until Additional Tier 1 is defined in CRD4, we would like to keep our power dry," he added.

MARKET EVOLUTION

Barry Donlon, head of capital and corporate syndicate at UBS, said the danger was setting precedents on new structures that would be difficult for others to emulate. Barclays' CoCo, for example, included complex features that would be difficult for other banks to copy, he said.

"Although we're seeing strong demand in Asia and Switzerland, we really need to make sure we are developing a sustainable market going forward," said Donlon.

Oliver Sedgwick, head of FIG syndicate at Goldman Sachs, said Tier 1 could pick up, although the instruments would have to include flexibility, while the pricing of such deals was also an area of difficulty.

He referenced Banco do Brasil's hybrid Tier 1 securities, which are trading at more favourable levels than their Western counterparts.

"Assuming that the current positivity in the market continues, we could see more of those types of deals," added Sedgwick.

Getting issuers more comfortable with issuing subordinated debt will first have to come from regulatory clarity, a theme that ran throughout all panel discussions at the conference.

"The starting point is the treatment from regulators, but then you have to start thinking about cost, and whether instruments are going to be cheaper than equity, and also about the tax implication, especially for Tier 1," said Andy Young, head of FIG syndicate at Credit Suisse.

NEXT STEPS

With examples of both low- and high-trigger CoCos now established, the next step in the market was potentially a perpetual high-trigger issue, added Young.

The ability to make that leap, however, will also depend on the investor base. Donlon at UBS said that if deals are structured correctly, there is a good institutional bid, adding that there were significantly more institutional investors that participated in the Swiss bank's second low trigger CoCo, a USD2bn 10-year bullet Tier 2 priced in August.

"The hedge fund community in London has carried the bank capital market for the past two to three years, but the real money community is coming back in. We're in quite a good place for having different investors interested in different securities," said Donlon.

BAML's Lamarliere said the transition from high/low trigger Tier 2 securities to perpetuals with no step-up would be a challenge.

"It should be possible if the price is right, but needs to be managed properly," he said.

Young, meanwhile, said that it was encouraging that peripheral issuers were back in the market, pointing to UniCredit's recent 10-year Lower Tier 2.

"At the very least, it's encouraging that peripheral national champions have access. As long as markets stay as they are, there's no reason we shouldn't see the basis between the core and peripheral narrow," said Young. (Reporting by Natalie Harrison, IFR Markets; editing by Helene Durand)

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