UPDATE 1-BBVA poised to sell debut euro CoCo

Tue Feb 11, 2014 6:13am EST

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By Aimee Donnellan

LONDON, Feb 11 (IFR) - Spain's second largest bank BBVA is preparing to sell its first euro-denominated Additional Tier 1 issue on Tuesday, becoming the latest bank to test European investor interest for the risky bonds that bolster banks' capital ratios.

BBVA is following in the footsteps of UBS, which unearthed EUR10.5bn of demand for a EUR2bn low trigger permanent write-down Tier 2 deal last week.

European banks are making the most of the improvement in funding levels to raise what analysts estimate will be EUR20bn and EUR45bn in Additional Tier 1 and Tier 2 debt this year.

Since October last year, the cost of insuring against subordinated debt against default has dropped by 86bp to 136bp, according to Markit's Subordinated Financials index on Tradeweb. The yield on UBS's low trigger issue, meanwhile, has dropped to 4.58% from 4.852% at launch.

BBVA was the first European bank to sell an Additional Tier 1 bond last April. That USD1.5bn perpetual non-call five-year deal priced with a 9% coupon and complied with the Capital Requirements Directive (CRD IV).

European accounts were the driving force behind the trade despite it being in dollars, taking nearly three quarters of the paper.

BBVA is taking advantage of the recent deals' performance and a significant tightening in its outstanding bond, which is bid at yield of 7%, 2% less than where it priced.

The new bond was first marketed at low to mid 7%, a level that a banker away from the deal said looked generous.

"As we have seen with other deals of this kind, banks tend to start at a wide level to whet the appetite of investors and then tighten in the pricing," the banker said.

"This could even end up with a high 6% coupon."

That looks to be a bit ambitious, however, with guidance at the first update revised to 7.125% area (plus or minus 0.125%) despite a book of over EUR11bn.

SIMPLICITY

Unlike last year's deal, which had to include as much as six triggers to satisfy various regulatory requirements, the new deal has a much more straightforward structure.

This time, bonds convert to equity if the bank breaches a 5.125% Common Equity Tier 1 ratio either at the bank or group level.

That should make the deal a much easier sell, bankers said.

BBVA is the second Spanish bank to test European investor interest for this kind of junior debt. Banco Popular Espanol in October last year sold a EUR500m Additional Tier 1, showing that even Europe's weaker banks can meet increasingly stringent capital requirements under the Basel III framework.

Barclays, BBVA, Citi and Morgan Stanley are joint bookrunners for the BBVA transaction, which is expected to be rated BB- by Fitch. (Reporting by Aimee Donnellan, Editing by Helene Durand, Julian Baker)

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