Santander and UBS expose deep Reg S pockets, DB lines up

Fri May 9, 2014 10:32am EDT

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LONDON, May 9 (IFR) - The US dollar Reg S market re-emerged as the go-to funding avenue for European banks looking to fortify their balance sheets this week, as two banks unearthed nearly USD18bn of investor demand for USD4bn of supply.

Spain's largest bank, Santander, priced its debut US dollar Additional Tier 1 bond - a USD1.5bn perpetual non-call five-year bond that attracted more than USD10bn of demand - while UBS was deluged with over USD7.7bn of orders for a chunky USD2.5bn 10-year bullet Tier 2 - the last of the Swiss bank's current wave of CoCos.

European issuers have tended to favour the more traditional euro or Yankee dollar markets in 2014, but a need to diversify while locking in competitive costs is proving too good to ignore.

"Both Santander and UBS have done euros this year, so it made sense for them to look at a different currency," a banker said. "Also, dollars is very cost-efficient given where dollars swaps are."

He estimated that by choosing US dollars, Santander had been able to price its deal 65bp tighter than where it would have priced a euro issue.

Furthermore, by using the Reg S route, issuers are able to avoid cumbersome documentation issues that they would have to face if they went to the onshore US market.

"Demand is robust for European CoCos in the Reg S market these days, as investors are still expecting a lot of performance from a sector that is still undervalued," said a FIG syndicate banker.

And while the currencies may be different, there is an overlap in terms of investor bases and it is pretty much the same people driving euro and US dollar Reg S issuance at the moment according to bankers.

"Santander and UBS both achieved great results, which is impressive considering they were both accessing the Reg S market, which has seen significant supply this week," said Barry Donlon, head of capital solutions at UBS.

Selling conditions proved to be ideal due to a dearth of bank subordinated supply in recent weeks and the fact that the cost of insuring subordinated debt has fallen to a four-year low. The iTraxx Subordinated index is at 113bp on Friday, according to Tradeweb.

Meanwhile, the Bank of America Merrill CoCo index has made a strong recovery since hitting a low of 101.195 on February 10 and was quoted at 105.868 this week.

DEUTSCHE NEXT

Demand is expected to remain strong, which is good news for Deutsche Bank, which concludes its investor roadshow ahead of its triple-tranche inaugural Additional Tier 1 transaction next week.

"There's plenty of demand left for Deutsche Bank's eagerly awaited inaugural AT1, which cash-rich investors can't afford to miss," said Vincent Hoarau, head of FIG syndicate at Credit Agricole.

"Santander's USD10bn order book is a really strong result that shows that the frenzy we saw in Q1 has come to an end. Having said that, the cash is there for any bank that is willing to pay the right price, particularly as supply has been fairly low in recent weeks, while the overall market tone is extremely constructive."

In the first quarter of this year, it became commonplace for investors to flood banks with tens of billions demand for Additional Tier 1 transactions, but that all changed when a glut of tightly priced deals caused indigestion in the sector.

Deutsche Bank gave further details on the size and shape of its Reg S issue on Wednesday during an investor call.

Germany's biggest bank is eyeing a perpetual non-call six-year for the US dollar tranche, a perpetual non-call seven or eight-year for the euro tranche and a perpetual non-call 10 or 12-year for the sterling tranche, although the final call dates will be decided on the back of investor feedback.

In terms of pricing, investors say secondary market performance is at the top of their wish lists.

"Santander left a bit on the table and the new bond is likely to perform reasonably well because of it, but UBS is not giving investors much of a new issue bonus," said Ian Robinson, head of credit at asset manager F&C.

Both UBS and Santander are trading up post pricing and were quoted at 100.35 and 100.25, respectively, on Friday morning, according to a syndicate banker. (Reporting by Aimee Donnellan; Editing by Helene Durand and Philip Wright)

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