BBVA AT1 wobbles after dividend cut
* Payment on AT1 unlikely to be affected by change in dividend policy
* Bonds drop less than a point in secondary market
By Helene Durand
LONDON, Oct 25 (IFR) - BBVA's new riskiest bonds merely wobbled after Spain's second largest lender announced it would be cutting shareholders' dividend payments, despite the potential for the security to see coupon payments curtailed.
BBVA became the first lender to implement a major change in its dividend policy on Friday after the Bank of Spain said earlier this year that banks should cap dividend payments.
The US$1.5bn Additional Tier 1 bond which priced in May - the first to comply with the capital requirements directive (CRD IV) - was down to 102.375/103 in cash price terms from 103.5 on Thursday.
As well as including triggers that could convert bonds into equity if the bank gets into trouble, BBVA can cancel coupon payments in whole or in part when it deems it necessary, giving the bank further financial flexibility. Once cancelled, coupons are lost forever.
"In a crisis, it would make sense to suspend coupons but this is not the case here. It would be a travesty and the name would be muddied," said one market participant. He highlighted how recently the deal was issued, and thought BBVA would do anything to protect coupon payments.
"Cutting dividends could actually be good news for bondholders as it keeps capital in the bank," he said.
The bank said its third quarter net income would be EUR195m, well below estimates of EUR614m, thanks to a EUR600m provisioning charge related to the reclassification of EUR3.9bn of restructured loans to NPL category.
BBVA's Additional Tier 1 was not its only bond under pressure this morning. Tier 2 and Tier 1 deals were around 10bp wider to swaps, while senior cash was a couple of basis points wider, and five-year CDS was 7bp wider at 191bp.
Friday has seen weaker market conditions, particularly for the peripheral credit, after considerable Italian bank debt issuance in recent weeks and expectations that Spanish banks are set to follow.
A EUR500m Additional Tier 1 priced for Banco Popular Espanol in October was also trading lower, quoted at 97.5 from 98.875 on Thursday.
Before the crisis, banks had been able to include features such as dividend pushers and stoppers on hybrid capital deals. In the case of the former, a bank must pay a coupon if it has paid a dividend, while the latter prevents a bank from paying a dividend unless it has paid on its hybrids. This change has reduced the attractiveness of the asset class for a lot of traditional real money bond investors.
The market for Additional Tier 1 securities has yet to fully develop; so far there have only been three deals, from BBVA, Societe Generale and Banco Popular Espanol. Therefore, any bank not playing by bondholder rules could derail the market just as it is getting going.
But BBVA appears aware of investor concerns. In a presentation to bondholders in April, the bank said it placed significant value on the capital provided by the Additional Tier 1 instruments.
"BBVA's objective is to maintain access to this key investor base for funding and capital purposes."
However, the deeply subordinated debt does not come cheap. BBVA pays 9% to bondholders at a time when it is trying to bolster its capital ahead of the ECB Asset Quality Review next year.
Debt bankers, however, hope the market will grow in size in the coming years as banks try to raise the most cost-efficient instruments to bolster their capital bases. European banks have the ability to raise 1.5% of RWAs via Additional Tier 1.
"If BBVA did decide to defer coupons, I don't think it would be the end of the world," said a banker. "We have seen Tier 1 coupons being switched off before. What it would do, however, is push investors to re-evaluate the asset class, and it would potentially mean that the next peripheral bank would have to pay more to get this done." (Reporting by Helene Durand, Additional reporting by Adam Parry, Editing by Alex Chambers and Julian Baker)
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