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