5 Min Read
* Banks look to fortify balance sheets ahead of stress tests
* Additional Tier 1 spreads tighten by as much as 90bp
* Peripheral/core pricing divide narrows
By Aimee Donnellan
LONDON, June 13 (IFR) - Europe's weakest banks are expected to make a frantic push into the Additional Tier 1 market in the coming months, keen to raise much-needed capital after a rally that has seen yields almost halve in a year.
The move to raise Additional Tier 1 bonds is part of a much broader recapitalisation of the banks ahead of the ECB stress tests. That process has seen lenders setting out on equity sprees to ensure their balance sheets are robust enough to withstand another crisis.
Troubled banks in Greece, Italy and Spain have already launched rights issues. Banca Monte dei Paschi di Siena, a bank that markets feared would collapse as recently as December, launched a 5bn rights issue early this week.
But even after those deals, some banks are still falling short. Sources said that regulators have already started warning banks in Germany, Austria and Southern Europe (including those that thought they had done enough to satisfy policymakers) to continue to boost their capital buffers - and soon.
"I wouldn't be surprised to see weaker banks looking to sell all kinds of debt - including Tier 2, senior and also Additional Tier 1 capital - because spreads are just so tight," said a London-based portfolio manager, who added that a 9% yield is now fair for AT1 deals from such issuers, assuming investors have done their credit homework.
Bankers agree and say that even the most troubled peripheral lenders would be unlikely to pay more than high single-digit yields to get deals done right now.
Spreads on Additional Tier 1 bonds have rallied by at least 25bp-50bp across the board since the ECB's announcement on June 5 that it would cut its refi and deposit rates and introduce another (more targeted) LTRO. For peripheral issuers, the moves were even more dramatic.
For example, Banco Popular Espanol's 500m AT1 screamed tighter following the ECB meeting and now offers a yield of just 6% - just over half the 11.5% coupon the bank paid on a deal that was priced last October.
"A lot of people now feel that Europe's banks are ultimately back-stopped. With the likes of BPE 11.5% trading at sub-6%, the yield levels look compelling for other banks to raise capital this way," said Keval Shah, head of investment-grade DCM syndicate at Lloyds Bank.
Chris Tuffey, head of DCM syndicate at Credit Suisse, agreed, saying: "The move tighter in the market could give issuers the impetus to move their plans forward."
For their part, investors have become ever more confident in the strength of the economy - or at least that the ECB will be able to do what is necessary to keep the wheels on the wagon.
To that extent, they may be willing to overlook a shortfall in equity cushions while the going is good - even for less stable banks.
Tuffey noted that the difference between BPE AT1 and Credit Suisse subordinated paper has tightened from around 670bp in October 2013 to circa 325bp currently.
"This shows the appetite that investors currently have for peripheral bank paper and is likely to fuel further issuance," he said.
The drivers of the rally in the last week or so - hedge funds - are also likely to be the biggest buyers of peripheral AT1s.
"When you look at the market, where high yield is coming in at under 5%, banks offering paper at a yield premium to that will be hard to pass up," said Shah.
The yield-to-worst on Barclays US high-yield bond index hit a record low of 4.91% this week - passing through the previous low of 4.95% from May 2013.
Still, an emergence of weaker banks in the AT1 market would be a significant step, as so far it has been dominated by national champions viewed as a safer bet.
BPE, Spain's fourth largest lender, is only the second tier-two bank to issue AT1s. Bankers say there haven't been more because the double-digit yield it paid put others off. The rally appears to have changed that calculation. (Reporting by Aimee Donnellan; Additional reporting Helene Durand; Editing by Natalie Harrison and Matthew Davies)