Nationwide CoCo blow-out spurs UK bank capital plans

Fri Mar 7, 2014 5:32am EST

* Market excited by new capital funding avenue

* Other UK lenders seek Nationwide's advice

* CCDS follow-up marks largest sterling capital trade since Lehman

By Aimee Donnellan

LONDON, March 7 (IFR) - UK banks are plotting capital trades in their home currency market after Nationwide this week sold the largest such deal since the collapse of Lehman, unearthing a surprisingly deep pool of investor demand.

Sterling has until now been overlooked by European banks looking to raise Additional Tier 1 bonds. Wary of trying and failing with something new, the continent's banks have relied instead on the US dollar and euro markets to ensure the success of their riskiest bond offerings.

This aversion to sterling, however, is a relatively new phenomenon. Pre-crisis in 2006, financials raised over £24bn of hybrid capital - a colossal figure considering just one issue sold in the market in January and February this year worth £750m.

But that all looks set to change after Nationwide's triumph on Tuesday. The UK mutual not only raised a chunky £1bn, but sold the 6.875% contingent capital bond some 10-15bp inside where euro and dollar offerings would have come, attracting a £11bn book in the process from over 500 investors.

"This is an incredible result for Nationwide but also it shows the depth of demand the sterling market can offer, which up until now had been seen as a niche currency for AT1 issuance," said Gordon Taylor, head of financial institutions DCM at RBS.

As the UK's third largest mortgage lender, Nationwide was in a unique position to test the market. Loved for its straightforward business model, the country's largest building society faced little opposition from investors.

"To get a 6% handle on a bond that has such a unique structure is a big endorsement of how comfortable accounts have become with the product, which is great news for all the banks that have to raise capital this year," said Barry Donlon, head of capital solutions at UBS.

Total issuance of Additional Tier 1 capital is likely to reach EUR31bn in 2014, JP Morgan analysts estimate based on a peer group of 25 European banks.

ENOUGH FOR NOW

For Nationwide, the results surpassed all expectations in terms of size, price and level of demand.

"I didn't even know there were 500 sterling investors that could buy the trade," said Andy Townsend, treasurer at Nationwide.

The deal is perpetual with a first call date in June 2019, and will be triggered if the issuer's fully-phased Common Equity Tier 1 ratio falls below 7%. A breach of that threshold will see the securities convert into Core Capital Deferred Shares (CCDS).

Last November, Nationwide sold £500m of CCDS to meet demands from the Prudential Regulatory Authority to beef up its leverage ratio ahead of the 2019 Basel deadline, and Townsend says the latest trade takes it further towards that target.

"CCDS was the first big test for Nationwide and its success was a great endorsement of our business model, but the result of the Additional Tier 1 bond has a much broader significance to other UK banks that have been calling to discuss similar transactions," said Townsend.

Having issued £250m more than initially intended, Nationwide is unlikely to return to the market this year - unless the regulator comes knocking again.

In the wake of the deal, sources say two UK banks are now eyeing the prospect of raising sterling capital to satisfy strict regulatory requirements and enhance their leverage ratios.

The improving market backdrop will certainly support further issuance, with investors continuing their quest for yield and buying riskier and riskier structures.

"This is a watershed moment for the AT1 product," said AJ Davidson, head of hybrid capital and balance sheet solutions for EMEA and Asia-Pacific at RBS.

"We now have AT1 in every major European currency and would expect not only other UK banks but major European banks to access the sterling market."

FILED UNDER: