LONDON, June 20 (IFR) - Coventry Building Society this week
successfully raised Additional Tier 1 debt that converts into
something that does not yet exist, but the nature of the credit
could make it hard for other issuers to replicate the structure.
The UK lender priced a £400m perpetual non-call 5.5-year
issue that converts into Core Capital Deferred Shares (CCDS) if
its Common Equity Tier 1 ratio falls below 7%. However, unlike
Nationwide Building Society, which issued CCDS before going to
the AT1 market, Coventry skipped that stage.
"It was very helpful for Coventry that Nationwide had issued
CCDS before and there was quite a lot of familiarity from the
investor base around the concept," said Daniel Fairclough, FIG
DCM at Barclays. "The deal might have been a lot harder to pull
off had it not been for investors' awareness of the product and
previous investor work undertaken by the issuer."
While Coventry's CCDS are purely conceptual at this stage,
the issuer has passed rule changes through its AGM providing the
flexibility to issue CCDS, either on conversion of the AT1 or as
"We didn't have a requirement for core equity, given that
our Common Equity Tier 1 ratio stands at 22.7%," said Lorne
Williams, treasurer at Coventry Building Society. "We did this
deal because we wanted to raise additional capital and cover our
regulatory needs going forward."
This high level of capitalisation was key to the success of
the trade, according to bankers on the deal. Coventry would have
to burn through £600m of capital before hitting the trigger,
which is 100 times the levels of impairments it has seen during
"Investors were genuinely impressed with Coventry's capital
strength and their profitability during the crisis," said
Fairclough. "This is also likely to be a one-off opportunity to
buy AT1 from the issuer in the medium term."
The deal attracted more than £3.25bn of demand from 230
investors and printed at 6.375%, tighter than initial price
thoughts of 6.5% area.
Final pricing offered a small pick-up over Nationwide's £1bn
perpetual non-call five-year AT1 which was quoted in the low 6s.
That priced with a 6.875% coupon back in March.
"It is a good price and reflects our credit and the
stability of our business model," said Williams.
The transaction goes a long way towards addressing
Coventry's leverage ratio, which was the main rationale for the
deal, according to Coventry's treasurer.
"Additional Tier 1 is a more efficient and cost-effective
way of tackling the leverage ratio," he said.
Investors welcomed Coventry's move and proactive approach to
"They could quite easily just let their leverage ratio
improve organically through retained earnings but they, like us,
think that the 3% minimum is not the ultimate goal of the PRA,"
John Magrath, partner and head of distribution at TwentyFour
Asset Management wrote in a note.
"By issuing £400mm of AT1, they can boost this measure of
their balance sheet by 140bp to 4.4%, taking them into the very
comfortable end of the leverage spectrum, but importantly
placing them nicely ahead of the 4% hurdle, which is where they
feel the regulator may be going - in the US the big banks now
have 5% as their hurdle."
While the distance to the conversion trigger is large, there
is more uncertainty around the cushion investors have before
Coventry potentially has to defer coupon payments.
"Right now, we don't know what the countercyclical buffer is
going to be and whether we will be deemed as a systemic
institution," said Williams. "There is so much uncertainty
around what the combined buffer requirements will be, but with a
capital ratio as high as we have, we think we are a long way
away from that."
Simon Adamson from CreditSights warned in a note on Friday
that investors were not being compensated for the risk they were
taking. "This looks very expensive, notwithstanding the domestic
nature of the issue, and we do not think it offers any value."
This did not deter investors who continued to look for the
bonds in the secondary market, helping the transaction to trade
up to 101.25/101.5.
(Reporting by Helene Durand, Editing by Julian Baker)