UPDATE 1-BBVA's complicated Tier 1 structure fails to deter investors

Tue Apr 30, 2013 7:40am EDT

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(Recasts, adds market comment)

By Aimee Donnellan

LONDON, April 30 (IFR) - BBVA's inaugural Additional Tier 1 bond got off to a strong start on Tuesday as investors piled into the new deal despite a complicated structure that has drawn criticism from market observers.

Spain's second largest bank attracted orders in excess of USD9.25bn for its perpetual non-call five-year bond and the coupon has been fixed at 9%. The bond will be sized in the USD1.25bn-USD1.5bn range.

Lead managers BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS began marketing the deal on Monday at 9.5% area, according to a market source, and this was then revised to 9.25% area during Tuesday's bookbuilding.

Although, bankers expected Asian investors to drive the momentum in the deal, a lead manager said that before books opened in Asia, European institutional investors had placed some USD4.5bn of orders.

"The pricing looks fair, and for future deals it's good to have it below the 10% threshold," said a DCM banker.

"The positive tone in the peripheral sector is certainly helping this deal along and will allow the issuer to print with a 9% yield."

Observers were surprised that the multiple triggers on the bond did not raise a few eyebrows in the market, but conceded that the bullish tone in the sector is driving investors to buy into structures they might otherwise avoid.

"From a broader market perspective, we would expect to see slightly simpler trigger structures coming through in due course, but it's great to have this market up and running," said Simon McGeary, head of the new products group at Citigroup.

"The multi-layered trigger makes this a more complicated structure in some respects, but that's a function of them wanting to solve several different capital objectives."

The trigger will be activated by multiple pre-defined events, which state that as long as the bank is subject to the sovereign charges, the Core Tier 1 capital ratio should not fall below 7%.

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 ratio.

When the charges are no longer applied, the trigger ratio will be reduced to 5.125% of CT1 capital. Before the announcement of the offer, BBVA announced its current CT1 ratio at 11.2% and posted better-than-expected results.

BBVA, like other European banks, needs to meet 1.5% of Additional Tier 1 capital requirements, and is seeking to raise the AT1 bonds to focus more on total capital rather than just core capital.

This bond is the first AT1 security that complies with the region's new Capital Requirements Regulation (CRR).

"Looking at the demand and the price BBVA is likely to achieve, it's quite clear that the market is getting comfortable with more aggressive and complicated subordinated capital instruments from banks," said A.J. Davidson, head of hybrid capital & balance sheet solutions for EMEA & APAC at RBS Markets.

"This could be a watershed moment for the bank capital market, and we are delighted to finally see the asset class emerge from the conceptual to the practical." (Reporting by Aimee Donnellan, editing by Julian Baker and Philip Wright; additional reporting by Josie Cox)

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