UPDATE 1-BBVA to sell first CRR-compliant Tier 1 bond

Fri Apr 26, 2013 5:20am EDT

By Aimee Donnellan

LONDON, April 26 (IFR) - BBVA is poised to be the first European bank to sell Additional Tier 1 bond securities that comply with the region's new Capital Requirements Regulation (CRR), possibly kick-starting a slew of deals heard to be in the pipeline to bolster bank capital ratios.

The Spanish bank, which also reported a 72.6% rise in first-quarter net profit on Friday, mandated BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS as joint bookrunners for the AT1 security, which could price as early as next week.

Marketing for the perpetual Reg S deal will begin on Monday and will include investor meetings in Asia, the UK and Switzerland.

On a call with analysts this morning, the issuer said it is likely to be a benchmark size.

The transaction will have an equity conversion structure with a 7% trigger.

That takes into account an additional charge imposed by the European Banking Authority for sovereign exposure following stress tests in 2011 that required all European banks to meet a 9% Core Tier 1 (CT1) ratio.

For the purpose of meeting this ratio, the EBA counts AT1 CoCos if they have a 7% CT1 trigger.

"They produced a term sheet that had a 7% CT1 trigger for as long as the sovereign charge applied, and when it ceases, the trigger becomes a 5.125% CET1 trigger," said a London-based hybrid capital banker.

"The idea was that once the sovereign crisis in Europe receded, the additional charge would fall away."

BBVA has a CT1 capital ratio of 11.2%, according to analysts at Mizuho, which gives investors a 420bp buffer over the 7% conversion trigger.

DEALS UNLEASHED?

Although the EBA is yet to disclose the final details of its technical standards, BBVA is likely to have got the go-ahead from the Spanish regulator, one market source said.

"It will be interesting to see what loss-absorption mechanics this deal will include," said the banker.

"Investors are going to be looking to old-style Tier 1 bonds and then will charge the bank for the inclusion of a trigger and coupon deferrals."

Some capital structuring bankers have predicted strong AT1 deal flow in the second quarter. Barclays, for example, is a contender to issue the securities, after winning approval from shareholders on Thursday.

The BBVA deal also coincides with a strong bid for peripheral debt, and in particular for national champions, which was reflected in UniCredit's USD750m 10NC5 Tier 2 bond on Wednesday. The deal - the first subordinated issue from the Italian bank in six months - attracted an order book of more than USD3bn.

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