Credit Suisse cracks European CoCo market
* First deal to tap into multi-billion deep market
* Private banks leave stage clear for institutional investors
By Helene Durand
LONDON, Sept 13 (IFR) - The bank capital market reached a new milestone this week, when Credit Suisse priced the first permanent write-down issue in the single currency, opening up a potentially deep market for banks seeking to meet Basel III requirements.
The EUR1.25bn 12-year non-call seven Tier 2 contingent capital trade attracted EUR3.15bn of orders, mainly from institutional investors, who bought 85% of the deal despite the risk they could lose everything if Credit Suisse breaches a 5% Common Equity Tier 1 ratio.
This is the first time this type of trade has been brought to the market that used to play a major part in fulfilling European banks' capital needs.
From 2005 up to the end of 2010, Western European banks raised EUR207bn of capital deals in euros versus a mere EUR90.2bn-equivalent in the US dollar market, according to Citigroup. Since then, only EUR17.74bn has been issued in euros, versus EUR31.42bn-equivalent in dollars.
As higher capital requirements kick in under Basel III, estimates are that banks will have to raise EUR150bn just in Additional Tier 1 in the coming years.
Meanwhile, as banks build greater loss-absorbing cushions to protect their senior debt, more capital trades are expected to come to market.
"This trade is a turning point for the market," said Piers Ronan, FIG syndicate at Credit Suisse. "While dollars will remain the major currency for capital issuance in the medium term, the fact that Credit Suisse could get EUR3.15bn of demand shows that there is depth in the euro currency for these deals, and we would expect to see more by the end of the year."
Bankers away from the deal agreed that it was positive to finally see a deal in euros. While there have been other CoCo issues in Europe, such as a EUR1bn deal for Bank of Ireland priced in January 2013, that transaction converts into equity at the trigger point and was a remarketing of securities previously owned by the government.
"We need to be firing on all cylinders," said Simon McGeary, head of the new products group at Citigroup. "The dollar market cannot absorb all the potential supply that we are expecting in the coming years."
For bankers, the proportion of institutional distribution versus what went to private banks is also positive. From the 60%-70% that was sold into private banks networks in 2012, this has dwindled to almost being what some call a rounding error in order books. They took a mere 5% of the Credit Suisse deal.
"More and more investors understand the structure and the fact that this is actually not so different from a plain vanilla Tier 2," said Ronan.
But while the deal appeared to work well and priced at the tight end of revised guidance of 400bp-412.5bp over mid-swaps and initial guidance of low 400s, the issuer had to compensate investors handsomely, pricing 150bp back of old-style Tier 2 instruments.
Ronan added that the bookbuilding was strong despite major hurdles for some investors, such as whether or not the deal would be included in some indices. Other buyers are simply prohibited from buying the product.
Meanwhile, a number of fixed income investors remain wary. "Comparatively, this is the most bondholder-friendly structure, but whether it opens the doors to others, I am not so sure," said one.
"I think a lot of people are sticking to their guns and have strong feelings against permanent write-down structures, but I wonder whether some are starting to think that it's not that different from any other sort of subordinated debt and, also, what else gives you a 5.75% coupon?," said another.
He added that while the Credit Suisse issue was helped by its BBB-/BBB+ investment-grade ratings, not all issues would be rated so highly.
The dollar market is expected to remain the go-to place for issuers, especially those seeking to sell more bespoke structures. A USD1bn 20-year non-call five for Credit Agricole this week was a case in point. Also, a saving of 25bp-50bp versus euros is another pull for borrowers.
"There is, however, currently a pricing advantage for issuers in using the dollar market, so we expect to continue to see deals in that currency as well, reflecting the depth of the US institutional market and the maturing of the Asian bid over recent years," said McGeary. (Reporting by Helene Durand, Editing by Philip Wright and Julian Baker)
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