BBVA boosts capital buffers with euro CoCo bond

Wed Feb 12, 2014 10:36am EST

LONDON, Feb 12 (IFR) - Spain's second largest bank, BBVA, bolstered its balance sheet this week with EUR1.5bn in Additional Tier 1 bonds, as the country continues to steal a march on much of the rest of Europe in raising this risky form of debt.

Spain is one of the rare countries in Europe where there is enough clarity for banks to issue Additional Tier 1 bonds. BBVA and Banco Popular Espanol have made the most of this, raising capital to fortify their balance sheets and improve their leverage ratios.

BBVA's new EUR1.5bn 7% perpetual non-call five-year issue was the Spanish lender's second Additional Tier 1 deal, but its first such outing in euros.

Investors quickly threw their weight behind the transaction, which converts to equity if BBVA breaches a pre-defined trigger. More than 600 investors rushed the Spanish lender with EUR14bn of orders, with the low interest rate environment continuing the drive into the riskiest assets.

"This is only the third euro-denominated Additional Tier 1 bond so far and the impressive result demonstrates the level of risk appetite in the market," said Tim Michael, head of FIG syndicate at Citigroup.

Only Credit Agricole and Barclays have raised Additional Tier 1 capital in both euros and US dollars, despite the fact that analysts estimate Europe's lenders will be looking to raise between EUR20bn and EUR45bn in Additional Tier 1 and Tier 2 debt this year.

Since October, the cost of insuring subordinated debt against default has dropped by 86bp, to 136bp, according to Markit's Subordinated Financials index on Tradeweb.

With increased confidence that the worst of Europe's woes are over, some investors have been actively encouraging further issuance, which would provide some much-needed diversity.

"We would like to see banks raising more of this kind of capital so they can improve their leverage ratios," said Dierk Brandenburg, a senior bank credit analyst at Fidelity.

"We are expecting more names to come to the market, as Deutsche Bank has explicitly said it will look to raise this kind of capital."

Banks from Italy and the Netherlands could be allowed to sell contingent capital (CoCo) bonds this year, as their politicians seek to level the playing field with other European jurisdictions.

MARKET RETURN

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).

Back then, European accounts were the driving force behind the trade despite its being in dollars, taking nearly three-quarters of the bond. This time around, European accounts took an even bigger chunk of the deal, with 81% of the bonds sold to them.

BBVA took advantage of the recent deals' performance and a significant tightening in its outstanding bond, which was bid at yield of 7% pre announcement, two percentage points less than where it priced. Investors are hoping other banks will follow the same course.

"A euro deal from BBVA is yet another step in broadening the market, and by simplifying the trigger it made it a more attractive prospect for investors," said Brandenburg.

Unlike the dollar issue, which had to include as many 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 made the deal a much easier sell, bankers said.

However, investors still face the risk that coupons could be deferred at regulators' complete discretion. (Reporting by Aimee Donnellan; Editing by Helene Durand, Alex Chambers and Philip Wright)