UPDATE 1-BPE tightens guidance despite lack of universal appeal
* Decent investor take-up despite loss-absorbing features
* Despite high coupon, deal still beats cost of equity
* BPE to raise a further EUR500m AT1 by mid 2014 (Adds background, investor views)
By Helene Durand
LONDON, Oct 3 (IFR) - Demand for Banco Popular Espanol's Additional Tier 1 perpetual non-call five-year issue, the first of its kind in euros, has grown to over EUR1.5bn despite the high risks inherent in the trade.
In fact, lead managers Bank of America Merrill Lynch, Barclays, Santander and UBS have revised price guidance on the EUR500m deal to 11.5% from the initial 11.75% area.
The transaction has attracted 184 orders from institutional investors, despite the risk their investment could be converted into equity if BPE's Common Equity Tier 1 ratio falls below 5.125%, or if its Tier 1 ratio falls below 6%. The latter trigger becomes redundant from January 2014.
"The conversion is a red-herring; the real risk here is that coupons can get switched off at the regulator's discretion and there is nothing stopping them from doing that. It is unconceivable to me why you would want to run such a risk as a bond investor," said one investor.
BPE itself also has full discretion on paying coupons, and can stop payments even if it continues with dividends to equity holders.
The investor also questioned the timing of the trade. "There is no settlement on the deferred tax assets issue," he said. "They could also do it cheaper after the stress tests so we are wondering why they are doing it now."
Another said he would rather wait for national champions rather than spend time conducting credit work on this deal.
"Additional Tier 1 is not for everyone, you have to decide whether you are comfortable in buying perpetual discretionary debt," one lead banker said.
"This is sold with very explicit risk and is a higher risk/higher return proposition and the investors involved are very sophisticated and FIG specialists. These are not the guys who were buying Tier 1 with 5% coupons back in 2007."
He added that the deal pays 900bp more than bonds where coupons are more certain.
A plus point is that BPE paid coupons on its hybrid debt and mandatory convertibles throughout the crisis, although the bank is currently not paying dividends.
One uninvolved banker suggested that the deal would mostly be attractive to hedge funds, given the high risks involved, and described it as a leveraged play on Spain.
Around 70% of the demand has come from UK based investors, while French and Swiss investors also feature.
BPE has said it needs to raise a further EUR500m of Additional Tier 1 by the middle of next year, but the deal's success is also important for other weak banks in Europe.
"I think it is clear that AT1 will play an important part in Bank Capital in CRD IV, so it makes sense to use it and avoid further dilution to the current equity holders," said a senior treasurer at a Spanish bank.
"What I consider challenging is the cost; 11.5% means almost EUR60m in dividends every year."
The debt is tax-deductible, however, so the bond's true cost is around 8%, versus 10.5% for equity. Meanwhile, the bank already made a EUR2.5bn cash call last year, making it difficult to come back for more.
"There are not many alternatives when it comes to raising capital," said a banker. "The cost of raising equity is high, as well as the dilutive impact."
He added that Additional Tier 1 does not come cheap and would be around 7% to 7.5%, even for a top bank. (Reporting by Helene Durand, additional reporting by Aimee Donnellan; editing by Alex Chambers, Julian Baker)
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