By Aimee Donnellan and Helene Durand
LONDON, March 5 (IFR) - Banco Santander and Danske Bank are
taking the European Additional Tier 1 market by storm,
attracting multi-billion order books for their inaugural
transactions as the market for high-risk loss absorbing bank
bonds hots up and coupons reach new lows.
The two deals follow hot on the heels of Nationwide Building
Society, which priced an inaugural GBP1bn perpetual non-call
5.25-year Additional Tier 1 (AT1) trade on Tuesday after
attracting some GBP11bn of demand.
It is the first time that two banks have gone head to head
in Europe to sell AT1 debt, and the latest sign that investors
simply can't get enough of a product they said they would never
"The market for AT1 has gone hell for leather, investors
can't get enough of this product," a syndicate banker said. "The
investor base is expanding rapidly with each new deal that comes
to market and everyone is looking, whether it's Asian private
banks, US funds, or European institutional accounts."
At the latest update, interest for Santander's perpetual
non-call five-year issue was more than EUR17bn from over 820
investors, while demand for Danske was described by a lead as
"There is an awful lot of momentum buying and investors are
loving these deals that yield anything between 6% and 8% where
they feel there is a low probability, at least in the near term,
of anything bad happening to them," said a fund manager.
Both Santander and Danske were able to tighten guidance on
their EUR1.5bn and EUR750m deals as demand poured in.
Santander will price its transaction with a 6.25% coupon,
having initially marketed the deal at a mid/high 6% yield.
Danske, meanwhile, will price at 5.75%, tighter than the early
6% area thoughts.
HOW LOW CAN YOU GO?
The launch levels show just how far the market has come in
only a short time. When BBVA priced the first European AT1 deal
last year, a dollar trade, it had to pay 9%.
When it returned to the market in February 2014, this time
in euros, it paid a mere 7%. That EUR1.5bn perpetual non-call
five-year deal has since tightened to 6.5%, and was used as the
best pricing point.
Danske Bank's issue is also breaking new ground, as the
first AT1 issue from a European bank to come with a coupon below
6%. Bankers away from the deal thought this was tight, although
it did not seem to impact investor demand.
"Although a Nordic bank,performance has been
much weaker than that of its Swedish and Norwegian competitors
and we think it should come with a coupon of close to 7%,
although we hear it will probably have a low 6% coupon, which in
our view offers little value," CreditSights analysts wrote in a
They said that Nationwide, which priced at 6.875%, also
looked rich. Nevertheless, asset managers took 66% of the deal,
while hedge funds and private banks bought 18% and 8%,
respectively. The bond had climbed to 101.71/101.75 by Wednesday
morning, according to Tradeweb, having priced at 100.014.
As with previous AT1 deals, the new bonds not only include
loss absorption features - conversion into equity in the case of
Santander and a temporary write-down for Danske - but also a
mechanism that prevents the banks from paying on their coupons
if they breach a certain capital level.
"Investors do ask a lot what will happen when the bank
ceases to meet its combined buffer and what it intends to do in
terms of paying coupons versus paying dividends," said a capital
solutions specialist. "A lot of it is about trust in the issuer
and management and the type of remedial action they intend to
take and whether they will respect investor hierarchy."
It seems that Santander, which has previously angered
investors with its aggressive approach to liability management,
was able to regain their trust.
"The fact that a bank like Santander which has been
unfriendly to bondholders in the past can issue says a lot about
the market," said the fund manager.
Lead managers on Santander are Bank of America Merrill
Lynch, Citigroup, Santander and UBS. Under the terms of the
deal, the bond will trigger if the bank's Common Equity Tier 1
(CET1) ratio falls below 5.125% at the bank or group level.
As of the end of 2013, Santander's CET1 ratio stood at
10.45% at the group and 12.26% at the bank level.
Bank of America Merrill Lynch, BNP Paribas, Danske Bank,
Goldman Sachs, HSBC and JP Morgan are leading the Danske issue,
which will be temporarily written down if the issuer's and/or
the group's CET1 ratio falls below 7% on a transitional basis.