UPDATE 1-Nationwide blazes sterling AT1 path

Tue Mar 4, 2014 5:41am EST

By Aimee Donnellan

LONDON, March 4 (IFR) - Nationwide Building Society has been deluged with over GBP9bn worth of demand for the first sterling-denominated Additional Tier 1 bond, showing the depth of the sterling market for UK names and offering hope that European financials can diversify into new currencies.

Nationwide is following in the footsteps of European banks like UBS, Barclays, Societe Generale and BBVA. Those have all raised this kind of subordinated debt to beef up their capital bases, although this is the first time a financial has diversified into the sterling market.

"This deal will be watched closely by UK banks looking to raise capital in their home currency and European issuers keen to diversify into new markets," said a capital expert.

The benchmark-sized deal is perpetual with a first call date on 20th June 2019, and will be triggered if Nationwide's fully-phased Common Equity Tier 1 ratio falls below 7%. In the case of such an event, the securities will be converted in full into Core Capital Deferred Shares (CCDS).

CCDS are similar to equity, being truly perpetual and with distributions that are variable and entirely discretionary.

Nationwide sold GBP500m of these securities last November and attracted orders of GBP1.6bn. The deal traded up to around 107 from its par issue price within days of being sold, and was quoted as high as 120 in recent days, according to a banker.

The improving market conditions have certainly helped the issuer. The cost of insuring both senior and subordinated debt has dropped by over 2bp on Tuesday as fears over the situation with Ukraine and Russia begin to ease.

The Senior Financials is 2.5bp tighter at 89.5bp, and the Subordinated nearly 3bp tighter at 130bp.

Against this backdrop lead managers Citigroup, Deutsche Bank, RBS and UBS began testing interest for the bond at 7.25%-7.5% having looked to Barclays' euro and dollar Additional Tier 1 bonds for guidance on pricing. Those perpetual non-call five-year deals were bid at mid-swaps plus 560bp and plus 520bp, respectively, for yields of 7.25% and 7%.

Factoring in cross currency basis swap rates, Nationwide is set to price through its country peer, bankers said.

"The market is looking good today, futures are up and the speed bump that everyone was anticipating yesterday from Ukraine never came," said another capital expert.

At the latest update, guidance have been revised to 7% area from the 7.25% to 7.5% initial price thoughts.

Nationwide is the country's third-largest mortgage lender.

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