Three banks prepare for momentous CoCo splurge

Fri Feb 28, 2014 9:08am EST

* Nationwide, Santander, Danske to test market boundaries

* Deutsche and UniCredit rumoured to be readying deals

* Pricing comes into focus as spread compression continues

By Aimee Donnellan

LONDON, Feb 28 (IFR) - At least three European banks are planning to issue contingent capital bonds next week, potentially going head-to-head on the same day in what would provide the toughest test of investor appetite yet for the high-risk instruments.

Nationwide Building Society, Santander and Danske Bank are all set to emerge with debut Additional Tier 1 bonds on Thursday, getting in ahead of a host of other European banks that are scrambling to get regulatory and tax approval for similar offerings.

"Next week could be the busiest week we've seen so far," said Robert Montague, a senior investment analyst at ECM Asset Management.

"All three banks are roadshowing so theoretically they could all emerge on the same day. It will be interesting to see how the market will cope with that."

Non-dilutive equity-like products such as AT1 are key instruments for banks to raise cheap capital to fortify their balance sheets and improve their leverage ratios. Under the Basel 3 framework, banks can raise 1.5% of their 6% Tier 1 capital ratio in this form.

The nascent AT1 sector's biggest test so far was in December 2013 when Credit Suisse and Barclays both printed deals during the same week, but the former was in dollars, by far the deepest capital market.

Next week's supply should feature a debut in sterling and issuance in euros, but investors say they are prepared for greater supply as long as it is priced and sized appropriately.

"There are a lot of new names being discussed at the moment with Deutsche Bank being probably the most obvious candidate but UniCredit might be next once its blackout period is out of the way," said Montague.

Increased confidence that the worst of Europe's woes are over has seen Markit's subordinated bank CDS index fall from 210bp in early October 2013 to 130bp, according to Tradeweb.

Santander, the first issuer to announce a mandate this week, is the most straightforward of the three credits given that BBVA and Banco Popular Espanol have already made the most of Spain's regulatory clarity on issuing Additional Tier 1.

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

"It's not just the banks that have mandated, every lender in the region needs to be raising capital this year which explains why issuers are rushing to sell deals," said a DCM banker.

HOW LOW CAN THEY GO?

It is not just the amount of deals investors have to contend with but also where to price the bonds, given the difference in credits and structures.

Baa1/A-/A rated Danske for example is looking to sell a loss-absorbing offering that will temporarily write-down if the bank's Common Equity Tier 1 ratio falls below 7%. At the moment, that ratio is 13.9%, meaning a buffer of nearly 700bp.

"The bond has a high trigger but has a big cushion to protect investors from a temporary write-down," said the banker.

"I think this is likely to offer the lowest coupon ever for one of these instruments and might even come with a 5% handle."

Santander, rated Baa2/BBB/BBB+, will be a much easier exercise, and investors say they will be happy to see it price on top of if not through BBVA's EUR1.5bn 7% equity convertible issue, which is now bid to yield at 6.5%.

"Santander has a more diversified business model than BBVA so could potentially price through it," said a portfolio manager.

But A2/A/A rated Nationwide will not be as straightforward. Not only is it seeking to open the sterling AT1 market, but Nationwide is a mutual and therefore has no equity into which the bonds can convert.

This should not present the market with too large a challenge, as Nationwide sold £500m of Core Capital Deferred Shares (CCDS) in November. And it is into these that the new bonds would convert in the case of Nationwide's CET1 ratio breaching 7%, said a banker involved in the exercise.

This will also be the first AT1 transaction from an unlisted entity and therefore something that could provide others with a template, the banker added.

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